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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. 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. We can see that Shougang Fushan Resources Group Limited (HKG:639) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Shougang Fushan Resources Group
What Is Shougang Fushan Resources Group's Net Debt?
As you can see below, at the end of June 2019, Shougang Fushan Resources Group had HK$121.9m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$5.21b in cash, so it actually has HK$5.09b net cash.
A Look At Shougang Fushan Resources Group's Liabilities
We can see from the most recent balance sheet that Shougang Fushan Resources Group had liabilities of HK$3.14b falling due within a year, and liabilities of HK$1.63b due beyond that. Offsetting this, it had HK$5.21b in cash and HK$2.14b in receivables that were due within 12 months. So it can boast HK$2.58b more liquid assets than total liabilities.
This surplus liquidity suggests that Shougang Fushan Resources Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Shougang Fushan Resources Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Shougang Fushan Resources Group grew its EBIT by 9.7% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shougang Fushan Resources Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.