Is SAL Steel (NSE: SALSTEEL) a risky investment?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies SAL Steel Limited (NSE: SALSTEEL) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.
See our latest review for SAL Steel
What is the debt of SAL Steel?
As you can see below, SAL Steel had a debt of 1.35 billion yen in September 2021, up from 1.62 billion yen the previous year. And he doesn’t have a lot of cash, so his net debt is about the same.
How strong is SAL Steel’s balance sheet?
Zooming in on the latest balance sheet data, we can see that SAL Steel had a liability of 1.23b due within 12 months and a liability of ₹ 1.13b due beyond. In return, he had 10.8 million cash and 477.1 million receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 1.87.
The lack here weighs heavily on the 841.2million yen business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . We would therefore monitor its record closely, without a doubt. After all, SAL Steel would likely need a major recapitalization if it were to pay its creditors today.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its earnings before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
SAL Steel has a debt to EBITDA ratio of 3.5, which signals significant debt, but is still reasonable enough for most types of businesses. However, its interest coverage of 634 is very high, which suggests that interest charges on debt are currently quite low. Notably, SAL Steel recorded a loss in EBIT level last year, but improved it to reach a positive EBIT of 283 million euros in the last twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of SAL Steel that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Over the past year, SAL Steel has recorded free cash flow totaling 93% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
Whereas SAL Steel’s total liability level makes us nervous. For example, its interest coverage and the conversion of EBIT into free cash flow give us some confidence in its ability to manage its debt. Taking the above factors together, we believe that SAL Steel’s debt poses certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 2 warning signs we spotted with SAL Steel (including 1 which is of concern).
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.