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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Pci Technology Group Co.,Ltd. (SHSE:600728) does carry debt. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Pci Technology GroupLtd's Debt?

As you can see below, Pci Technology GroupLtd had CN¥135.0m of debt at September 2024, down from CN¥315.2m a year prior. But it also has CN¥813.4m in cash to offset that, meaning it has CN¥678.4m net cash.

How Strong Is Pci Technology GroupLtd's Balance Sheet?

According to the last reported balance sheet, Pci Technology GroupLtd had liabilities of CN¥5.81b due within 12 months, and liabilities of CN¥232.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥813.4m as well as receivables valued at CN¥6.11b due within 12 months. So it can boast CN¥876.6m 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!

Although Pci Technology GroupLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥138m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pci Technology GroupLtd 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.

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. During the last year, Pci Technology GroupLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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¥678.4m, as well as more liquid assets than liabilities. So we don't have any problem with Pci Technology GroupLtd's use of debt. 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 3 warning signs for Pci Technology GroupLtd (1 is potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.