Ningbo PIA Automation Holding (SHSE:688306) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Ningbo PIA Automation Holding Corp. (SHSE:688306) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ningbo PIA Automation Holding

How Much Debt Does Ningbo PIA Automation Holding Carry?

As you can see below, Ningbo PIA Automation Holding had CN¥1.13b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥798.6m in cash leading to net debt of about CN¥327.0m.

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

According to the last reported balance sheet, Ningbo PIA Automation Holding had liabilities of CN¥2.39b due within 12 months, and liabilities of CN¥902.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥798.6m as well as receivables valued at CN¥357.5m due within 12 months. So its liabilities total CN¥2.14b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ningbo PIA Automation Holding has a market capitalization of CN¥4.96b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Ningbo PIA Automation Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to CN¥2.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Ningbo PIA Automation Holding still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥194m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥56m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. We've identified 1 warning sign with Ningbo PIA Automation Holding , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.