Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Pangang Group Vanadium & Titanium Resources Co., Ltd. (SZSE:000629) 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Pangang Group Vanadium & Titanium Resources Carry?

The chart below, which you can click on for greater detail, shows that Pangang Group Vanadium & Titanium Resources had CN¥109.1m in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥1.07b in cash, leading to a CN¥961.3m net cash position.

How Strong Is Pangang Group Vanadium & Titanium Resources' Balance Sheet?

We can see from the most recent balance sheet that Pangang Group Vanadium & Titanium Resources had liabilities of CN¥2.02b falling due within a year, and liabilities of CN¥632.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.07b as well as receivables valued at CN¥1.04b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥549.2m.

Of course, Pangang Group Vanadium & Titanium Resources has a market capitalization of CN¥23.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Pangang Group Vanadium & Titanium Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Pangang Group Vanadium & Titanium Resources's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pangang Group Vanadium & Titanium Resources's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pangang Group Vanadium & Titanium Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Pangang Group Vanadium & Titanium Resources recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Pangang Group Vanadium & Titanium Resources's liabilities, but we can be reassured by the fact it has has net cash of CN¥961.3m. And it impressed us with free cash flow of -CN¥153m, being 78% of its EBIT. So we are not troubled with Pangang Group Vanadium & Titanium Resources's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Pangang Group Vanadium & Titanium Resources you should be aware of.

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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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.

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