Guangzhou Pearl River Piano GroupLtd (SZSE:002678) Has Debt But No Earnings; Should You Worry?

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. We can see that Guangzhou Pearl River Piano Group Co.,Ltd (SZSE:002678) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Guangzhou Pearl River Piano GroupLtd

What Is Guangzhou Pearl River Piano GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Guangzhou Pearl River Piano GroupLtd had debt of CN¥418.5m at the end of September 2023, a reduction from CN¥550.9m over a year. But it also has CN¥1.53b in cash to offset that, meaning it has CN¥1.12b net cash.

A Look At Guangzhou Pearl River Piano GroupLtd's Liabilities

According to the last reported balance sheet, Guangzhou Pearl River Piano GroupLtd had liabilities of CN¥945.5m due within 12 months, and liabilities of CN¥115.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥277.8m due within 12 months. So it actually has CN¥750.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Guangzhou Pearl River Piano GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Guangzhou Pearl River Piano GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangzhou Pearl River Piano 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.

Over 12 months, Guangzhou Pearl River Piano GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 29%. To be frank that doesn't bode well.

So How Risky Is Guangzhou Pearl River Piano GroupLtd?

While Guangzhou Pearl River Piano GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥29m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Guangzhou Pearl River Piano GroupLtd you should be aware of, and 1 of them is significant.

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.

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.