Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ningbo PIA Automation Holding Corp. (SHSE:688306) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

What Is Ningbo PIA Automation Holding's Net Debt?

As you can see below, Ningbo PIA Automation Holding had CN¥1.14b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥785.3m in cash, and so its net debt is CN¥358.7m.

A Look At Ningbo PIA Automation Holding's Liabilities

According to the last reported balance sheet, Ningbo PIA Automation Holding had liabilities of CN¥2.57b due within 12 months, and liabilities of CN¥799.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥785.3m as well as receivables valued at CN¥300.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.28b.

While this might seem like a lot, it is not so bad since Ningbo PIA Automation Holding has a market capitalization of CN¥7.83b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Ningbo PIA Automation Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ningbo PIA Automation Holding saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Ningbo PIA Automation Holding had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥211m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥166m into a profit. So we do think this stock is quite risky. 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. For instance, we've identified 2 warning signs for Ningbo PIA Automation Holding (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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