Is Guangzhou Pearl River Piano GroupLtd (SZSE:002678) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Guangzhou Pearl River Piano Group Co.,Ltd (SZSE:002678) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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¥184.3m at the end of March 2024, a reduction from CN¥549.3m over a year. But it also has CN¥1.15b in cash to offset that, meaning it has CN¥967.7m net cash.

How Strong Is Guangzhou Pearl River Piano GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangzhou Pearl River Piano GroupLtd had liabilities of CN¥533.6m falling due within a year, and liabilities of CN¥84.0m due beyond that. On the other hand, it had cash of CN¥1.15b and CN¥171.5m worth of receivables due within a year. So it can boast CN¥705.8m 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 it is Guangzhou Pearl River Piano GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Guangzhou Pearl River Piano GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥968m. To be frank that doesn't bode well.

So How Risky Is Guangzhou Pearl River Piano GroupLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Guangzhou Pearl River Piano GroupLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥359m of cash and made a loss of CN¥45m. With only CN¥967.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Guangzhou Pearl River Piano GroupLtd that you should be aware of before investing here.

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.

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