Ningbo PIA Automation Holding (SHSE:688306) Is Carrying A Fair Bit Of Debt

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. As with many other companies Ningbo PIA Automation Holding Corp. (SHSE:688306) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ningbo PIA Automation Holding

How Much Debt Does Ningbo PIA Automation Holding Carry?

The chart below, which you can click on for greater detail, shows that Ningbo PIA Automation Holding had CN¥1.14b in debt in September 2024; about the same as the year before. On the flip side, it has CN¥785.3m in cash leading to net debt of about CN¥358.7m.

How Strong Is Ningbo PIA Automation Holding's Balance Sheet?

We can see from the most recent balance sheet that Ningbo PIA Automation Holding had liabilities of CN¥2.57b falling due within a year, and liabilities of CN¥799.2m due beyond that. Offsetting these obligations, it had cash of CN¥785.3m as well as receivables valued at CN¥300.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.28b.

Since publicly traded Ningbo PIA Automation Holding shares are worth a total of CN¥12.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ningbo PIA Automation Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ningbo PIA Automation Holding saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Ningbo PIA Automation Holding produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥211m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥166m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Ningbo PIA Automation Holding , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.