We Think Kao Hsing Chang Iron & Steel (TPE:2008) Has A Fair Chunk Of Debt

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. Importantly, Kao Hsing Chang Iron & Steel Corp. (TPE:2008) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kao Hsing Chang Iron & Steel

How Much Debt Does Kao Hsing Chang Iron & Steel Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Kao Hsing Chang Iron & Steel had debt of NT$2.78b, up from NT$2.47b in one year. However, it also had NT$1.19b in cash, and so its net debt is NT$1.59b.

A Look At Kao Hsing Chang Iron & Steel's Liabilities

We can see from the most recent balance sheet that Kao Hsing Chang Iron & Steel had liabilities of NT$2.87b falling due within a year, and liabilities of NT$254.5m due beyond that. Offsetting these obligations, it had cash of NT$1.19b as well as receivables valued at NT$107.7m due within 12 months. So it has liabilities totalling NT$1.83b more than its cash and near-term receivables, combined.

Kao Hsing Chang Iron & Steel has a market capitalization of NT$3.39b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kao Hsing Chang Iron & Steel will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Kao Hsing Chang Iron & Steel had a loss before interest and tax, and actually shrunk its revenue by 34%, to NT$863m. That makes us nervous, to say the least.

Caveat Emptor

While Kao Hsing Chang Iron & 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$116m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$41m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Kao Hsing Chang Iron & Steel (2 can't be ignored) you should be aware of.

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. 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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