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Oct 28, 2024

Does Shanxi Taigang Stainless Steel (SZSE:000825) Have A Healthy Balance Sheet? - Simply Wall St News

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

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.' 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. Importantly, Shanxi Taigang Stainless Steel Co., Ltd. (SZSE:000825) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanxi Taigang Stainless Steel

As you can see below, Shanxi Taigang Stainless Steel had CN¥9.80b of debt at June 2024, down from CN¥12.1b a year prior. However, because it has a cash reserve of CN¥8.71b, its net debt is less, at about CN¥1.09b.

The latest balance sheet data shows that Shanxi Taigang Stainless Steel had liabilities of CN¥23.4b due within a year, and liabilities of CN¥9.35b falling due after that. Offsetting these obligations, it had cash of CN¥8.71b as well as receivables valued at CN¥2.41b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥21.7b.

This is a mountain of leverage relative to its market capitalization of CN¥21.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanxi Taigang Stainless Steel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shanxi Taigang Stainless Steel saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Importantly, Shanxi Taigang Stainless Steel had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥1.4b. 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¥446m. So to be blunt we do think it is 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shanxi Taigang Stainless Steel you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Engages in the production and sales of steel products in China and internationally.

Adequate balance sheet and slightly overvalued.