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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Pubang Landscape Architecture Co., Ltd (SZSE:002663) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Pubang Landscape Architecture Carry?

The image below, which you can click on for greater detail, shows that Pubang Landscape Architecture had debt of CN¥245.6m at the end of September 2024, a reduction from CN¥274.6m over a year. But on the other hand it also has CN¥786.2m in cash, leading to a CN¥540.6m net cash position.

How Healthy Is Pubang Landscape Architecture's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pubang Landscape Architecture had liabilities of CN¥1.97b due within 12 months and liabilities of CN¥224.1m due beyond that. Offsetting these obligations, it had cash of CN¥786.2m as well as receivables valued at CN¥1.79b due within 12 months. So it actually has CN¥378.3m more liquid assets than total liabilities.

This surplus suggests that Pubang Landscape Architecture has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pubang Landscape Architecture has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Pubang Landscape Architecture'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, Pubang Landscape Architecture made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Pubang Landscape Architecture?

While Pubang Landscape Architecture lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥20m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Pubang Landscape Architecture's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.