Angang Steel (HKG:347) Has A Pretty Healthy Balance Sheet

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 Angang Steel Company Limited (HKG:347) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Angang Steel

How Much Debt Does Angang Steel Carry?

You can click the graphic below for the historical numbers, but it shows that Angang Steel had CN¥6.11b of debt in March 2022, down from CN¥10.8b, one year before. But it also has CN¥6.48b in cash to offset that, meaning it has CN¥379.0m net cash.

How Healthy Is Angang Steel's Balance Sheet?

The latest balance sheet data shows that Angang Steel had liabilities of CN¥34.5b due within a year, and liabilities of CN¥5.05b falling due after that. On the other hand, it had cash of CN¥6.48b and CN¥6.39b worth of receivables due within a year. So its liabilities total CN¥26.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥27.2b, so it does suggest shareholders should keep an eye on Angang Steel's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Angang Steel boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Angang Steel has boosted its EBIT by 100%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Angang Steel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Angang Steel has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Angang Steel actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Angang Steel does have more liabilities than liquid assets, it also has net cash of CN¥379.0m. And it impressed us with free cash flow of CN¥8.2b, being 129% of its EBIT. So we don't have any problem with Angang Steel's use of debt. 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 Angang Steel .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.