Is Pinlive Foods (SZSE:300892) Using Too Much 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.' 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 Pinlive Foods Co., Ltd. (SZSE:300892) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. 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.

See our latest analysis for Pinlive Foods

What Is Pinlive Foods's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Pinlive Foods had debt of CN¥61.4m, up from CN¥41.3m in one year. But on the other hand it also has CN¥502.1m in cash, leading to a CN¥440.7m net cash position.

How Healthy Is Pinlive Foods' Balance Sheet?

The latest balance sheet data shows that Pinlive Foods had liabilities of CN¥174.2m due within a year, and liabilities of CN¥59.0m falling due after that. Offsetting this, it had CN¥502.1m in cash and CN¥79.5m in receivables that were due within 12 months. So it can boast CN¥348.4m more liquid assets than total liabilities.

This surplus suggests that Pinlive Foods has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pinlive Foods 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 Pinlive Foods will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Pinlive Foods made a loss at the EBIT level, and saw its revenue drop to CN¥899m, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Pinlive Foods?

Although Pinlive Foods had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥64m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that Pinlive Foods is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.