We Think Ningbo PIA Automation Holding (SHSE:688306) Has A Fair Chunk Of Debt

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.' 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. We can see that Ningbo PIA Automation Holding Corp. (SHSE:688306) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Ningbo PIA Automation Holding

What Is Ningbo PIA Automation Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ningbo PIA Automation Holding had CN¥1.13b of debt, an increase on CN¥1.02b, over one year. However, because it has a cash reserve of CN¥1.01b, its net debt is less, at about CN¥118.2m.

A Look At Ningbo PIA Automation Holding's Liabilities

We can see from the most recent balance sheet that Ningbo PIA Automation Holding had liabilities of CN¥2.64b falling due within a year, and liabilities of CN¥773.5m due beyond that. On the other hand, it had cash of CN¥1.01b and CN¥334.7m worth of receivables due within a year. So its liabilities total CN¥2.07b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ningbo PIA Automation Holding is worth CN¥6.16b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ningbo PIA Automation Holding's earnings that will influence how the balance sheet holds up in the future. 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 4.2%, to CN¥2.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Ningbo PIA Automation Holding had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥210m. 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¥211m 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. Be aware that Ningbo PIA Automation Holding is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.