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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Guangzhou Pearl River Piano Group Co.,Ltd (SZSE:002678) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Guangzhou Pearl River Piano GroupLtd

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

As you can see below, Guangzhou Pearl River Piano GroupLtd had CN¥131.3m of debt at September 2024, down from CN¥418.5m a year prior. But on the other hand it also has CN¥906.3m in cash, leading to a CN¥775.0m net cash position.

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¥380.9m falling due within a year, and liabilities of CN¥147.9m due beyond that. Offsetting these obligations, it had cash of CN¥906.3m as well as receivables valued at CN¥206.3m due within 12 months. So it can boast CN¥583.8m 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. Simply put, the fact that Guangzhou Pearl River Piano GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 40%, to CN¥753m. That makes us nervous, to say the least.

So How Risky Is Guangzhou Pearl River Piano GroupLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Guangzhou Pearl River Piano GroupLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥411m and booked a CN¥139m accounting loss. With only CN¥775.0m 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Guangzhou Pearl River Piano GroupLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.