David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Pinlive Foods Co., Ltd. (SZSE:300892) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Pinlive Foods Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Pinlive Foods had debt of CN¥61.4m, up from CN¥41.3m in one year. But on the other hand it also has CN¥502.1m in cash, leading to a CN¥440.7m net cash position.

How Healthy Is Pinlive Foods' Balance Sheet?

The latest balance sheet data shows that Pinlive Foods had liabilities of CN¥174.2m due within a year, and liabilities of CN¥59.0m falling due after that. Offsetting these obligations, it had cash of CN¥502.1m as well as receivables valued at CN¥79.5m due within 12 months. So it actually has CN¥348.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Pinlive Foods could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pinlive Foods boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pinlive Foods will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Pinlive Foods had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥899m. That makes us nervous, to say the least.

So How Risky Is Pinlive Foods?

Although Pinlive Foods had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥64m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Pinlive Foods that you should be aware of before investing here.

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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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.