Quintain Steel (TPE:2017) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Quintain Steel Co., LTD. (TPE:2017) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Quintain Steel

How Much Debt Does Quintain Steel Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Quintain Steel had NT$3.32b of debt, an increase on NT$2.88b, over one year. However, because it has a cash reserve of NT$501.1m, its net debt is less, at about NT$2.82b.

How Healthy Is Quintain Steel's Balance Sheet?

The latest balance sheet data shows that Quintain Steel had liabilities of NT$2.64b due within a year, and liabilities of NT$1.27b falling due after that. Offsetting these obligations, it had cash of NT$501.1m as well as receivables valued at NT$300.5m due within 12 months. So its liabilities total NT$3.11b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of NT$3.34b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Quintain Steel will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Quintain Steel had a loss before interest and tax, and actually shrunk its revenue by 23%, to NT$3.3b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Quintain Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$163m at the EBIT level. 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. Another cause for caution is that is bled NT$188m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 3 warning signs with Quintain Steel (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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. 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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