Is Angang Steel (HKG:347) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Angang Steel Company Limited (HKG:347) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Angang Steel

What Is Angang Steel's Net Debt?

The image below, which you can click on for greater detail, shows that Angang Steel had debt of CN¥6.57b at the end of September 2022, a reduction from CN¥7.24b over a year. On the flip side, it has CN¥6.16b in cash leading to net debt of about CN¥403.0m.

How Strong Is Angang Steel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Angang Steel had liabilities of CN¥33.7b due within 12 months and liabilities of CN¥2.21b due beyond that. On the other hand, it had cash of CN¥6.16b and CN¥4.76b worth of receivables due within a year. So its liabilities total CN¥25.0b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥26.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Angang Steel made a loss at the EBIT level, and saw its revenue drop to CN¥129b, which is a fall of 6.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Angang Steel had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥562m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥419m. So in short it's a really risky stock. 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 .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.