Maanshan Iron & Steel (HKG:323) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Maanshan Iron & Steel Company Limited (HKG:323) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Maanshan Iron & Steel

What Is Maanshan Iron & Steel's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Maanshan Iron & Steel had debt of CN¥21.9b, up from CN¥17.4b in one year. However, because it has a cash reserve of CN¥5.14b, its net debt is less, at about CN¥16.8b.

How Strong Is Maanshan Iron & Steel's Balance Sheet?

The latest balance sheet data shows that Maanshan Iron & Steel had liabilities of CN¥44.2b due within a year, and liabilities of CN¥9.21b falling due after that. Offsetting these obligations, it had cash of CN¥5.14b as well as receivables valued at CN¥5.07b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥43.2b.

This deficit casts a shadow over the CN¥14.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Maanshan Iron & Steel would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Maanshan Iron & Steel can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Maanshan Iron & Steel's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Maanshan Iron & Steel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥1.5b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥6.5b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Maanshan Iron & Steel .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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