The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Pubang Landscape Architecture Co., Ltd (SZSE:002663) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pubang Landscape Architecture

What Is Pubang Landscape Architecture's Net Debt?

The image below, which you can click on for greater detail, shows that Pubang Landscape Architecture had debt of CN¥274.6m at the end of September 2023, a reduction from CN¥303.5m over a year. However, its balance sheet shows it holds CN¥851.2m in cash, so it actually has CN¥576.6m net cash.

A Look At Pubang Landscape Architecture's Liabilities

The latest balance sheet data shows that Pubang Landscape Architecture had liabilities of CN¥1.93b due within a year, and liabilities of CN¥239.4m falling due after that. On the other hand, it had cash of CN¥851.2m and CN¥2.10b worth of receivables due within a year. So it can boast CN¥775.9m more liquid assets than total liabilities.

This excess liquidity suggests that Pubang Landscape Architecture is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Pubang Landscape Architecture boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Pubang Landscape Architecture made a loss at the EBIT level, and saw its revenue drop to CN¥2.3b, which is a fall of 9.0%. We would much prefer see growth.

So How Risky Is Pubang Landscape Architecture?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Pubang Landscape Architecture had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥62m of cash and made a loss of CN¥207m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥576.6m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Pubang Landscape Architecture you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.