Chien Shing Stainless Steel (TPE:2025) 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.' 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, Chien Shing Stainless Steel Co., Ltd. (TPE:2025) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chien Shing Stainless Steel

What Is Chien Shing Stainless Steel's Net Debt?

As you can see below, Chien Shing Stainless Steel had NT$799.1m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has NT$478.0m in cash leading to net debt of about NT$321.1m.

How Strong Is Chien Shing Stainless Steel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chien Shing Stainless Steel had liabilities of NT$237.4m due within 12 months and liabilities of NT$992.8m due beyond that. Offsetting these obligations, it had cash of NT$478.0m as well as receivables valued at NT$1.13m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$751.1m.

This is a mountain of leverage relative to its market capitalization of NT$843.5m. 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 it is Chien Shing Stainless Steel's earnings that will influence how the balance sheet holds up in the future. 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 Chien Shing Stainless Steel had a loss before interest and tax, and actually shrunk its revenue by 33%, to NT$881m. That makes us nervous, to say the least.

Caveat Emptor

While Chien Shing Stainless 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. Indeed, it lost a very considerable NT$244m 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. 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 NT$232m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Chien Shing Stainless Steel (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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