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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Pci Technology Group Co.,Ltd. (SHSE:600728) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Pci Technology GroupLtd Carry?

As you can see below, Pci Technology GroupLtd had CN¥32.6m of debt at June 2024, down from CN¥517.7m a year prior. However, it does have CN¥1.27b in cash offsetting this, leading to net cash of CN¥1.24b.

How Healthy Is Pci Technology GroupLtd's Balance Sheet?

According to the last reported balance sheet, Pci Technology GroupLtd had liabilities of CN¥5.63b due within 12 months, and liabilities of CN¥253.4m due beyond 12 months. On the other hand, it had cash of CN¥1.27b and CN¥5.55b worth of receivables due within a year. So it actually has CN¥946.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Pci Technology GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pci Technology GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Pci Technology GroupLtd turned things around in the last 12 months, delivering and EBIT of CN¥30m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pci Technology GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Pci Technology GroupLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pci Technology GroupLtd has net cash of CN¥1.24b, as well as more liquid assets than liabilities. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in CN¥37m. So we don't think Pci Technology GroupLtd's use of debt is risky. Even though Pci Technology GroupLtd lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.