Is Chia Yi Steel (GTSM:2067) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Chia Yi Steel Co., Ltd. (GTSM:2067) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chia Yi Steel

How Much Debt Does Chia Yi Steel Carry?

As you can see below, Chia Yi Steel had NT$701.4m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$141.2m in cash offsetting this, leading to net debt of about NT$560.1m.

A Look At Chia Yi Steel's Liabilities

Zooming in on the latest balance sheet data, we can see that Chia Yi Steel had liabilities of NT$643.6m due within 12 months and liabilities of NT$347.6m due beyond that. Offsetting these obligations, it had cash of NT$141.2m as well as receivables valued at NT$190.8m due within 12 months. So it has liabilities totalling NT$659.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$677.1m, so it does suggest shareholders should keep an eye on Chia Yi Steel's use of debt. 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 Chia Yi Steel's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Chia Yi Steel had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$721m. That's not what we would hope to see.

Caveat Emptor

While Chia Yi Steel's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$52m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$37m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Chia Yi Steel , and understanding them should be part of your investment process.

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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