Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Pangang Group Vanadium & Titanium Resources Co., Ltd. (SZSE:000629) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Pangang Group Vanadium & Titanium Resources's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Pangang Group Vanadium & Titanium Resources had CN¥132.1m of debt, an increase on CN¥119.7m, over one year. However, it does have CN¥4.65b in cash offsetting this, leading to net cash of CN¥4.52b.
How Healthy Is Pangang Group Vanadium & Titanium Resources' Balance Sheet?
The latest balance sheet data shows that Pangang Group Vanadium & Titanium Resources had liabilities of CN¥2.18b due within a year, and liabilities of CN¥617.9m falling due after that. Offsetting this, it had CN¥4.65b in cash and CN¥998.9m in receivables that were due within 12 months. So it can boast CN¥2.85b more liquid assets than total liabilities.
This short term liquidity is a sign that Pangang Group Vanadium & Titanium Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pangang Group Vanadium & Titanium Resources boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Pangang Group Vanadium & Titanium Resources if management cannot prevent a repeat of the 41% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pangang Group Vanadium & Titanium Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pangang Group Vanadium & Titanium Resources has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Pangang Group Vanadium & Titanium Resources generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Pangang Group Vanadium & Titanium Resources has CN¥4.52b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥736m, being 85% of its EBIT. So we don't have any problem with Pangang Group Vanadium & Titanium Resources's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Pangang Group Vanadium & Titanium Resources that you should be aware of before investing here.
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.