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. We can see that Pci Technology Group Co.,Ltd. (SHSE:600728) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Pci Technology GroupLtd
How Much Debt Does Pci Technology GroupLtd Carry?
As you can see below, at the end of June 2023, Pci Technology GroupLtd had CN¥517.7m of debt, up from CN¥202.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.28b in cash, so it actually has CN¥1.76b net cash.
How Strong Is Pci Technology GroupLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Pci Technology GroupLtd had liabilities of CN¥4.91b due within 12 months and liabilities of CN¥543.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.28b as well as receivables valued at CN¥4.79b due within 12 months. So it can boast CN¥1.61b more liquid assets than total liabilities.
This surplus suggests that Pci Technology GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pci Technology GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Pci Technology GroupLtd'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.
Over 12 months, Pci Technology GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥5.5b, which is a fall of 10%. That's not what we would hope to see.
So How Risky Is Pci Technology GroupLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Pci Technology GroupLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥55m of cash and made a loss of CN¥93m. Given it only has net cash of CN¥1.76b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Pci Technology GroupLtd that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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.