Does Pangang Group Vanadium & Titanium Resources (SZSE:000629) Have A Healthy Balance Sheet?

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.' 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, Pangang Group Vanadium & Titanium Resources Co., Ltd. (SZSE:000629) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Pangang Group Vanadium & Titanium Resources

What Is Pangang Group Vanadium & Titanium Resources's Net Debt?

The image below, which you can click on for greater detail, shows that Pangang Group Vanadium & Titanium Resources had debt of CN¥66.0m at the end of September 2024, a reduction from CN¥132.1m over a year. But it also has CN¥1.49b in cash to offset that, meaning it has CN¥1.42b net cash.

A Look At Pangang Group Vanadium & Titanium Resources' Liabilities

According to the last reported balance sheet, Pangang Group Vanadium & Titanium Resources had liabilities of CN¥1.84b due within 12 months, and liabilities of CN¥607.9m due beyond 12 months. Offsetting this, it had CN¥1.49b in cash and CN¥593.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥362.8m more than its cash and near-term receivables, combined.

This state of affairs indicates that Pangang Group Vanadium & Titanium Resources' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥29.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Pangang Group Vanadium & Titanium Resources also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Pangang Group Vanadium & Titanium Resources's load is not too heavy, because its EBIT was down 60% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pangang Group Vanadium & Titanium Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pangang Group Vanadium & Titanium Resources has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Pangang Group Vanadium & Titanium Resources actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pangang Group Vanadium & Titanium Resources has CN¥1.42b in net cash. And it impressed us with free cash flow of -CN¥44m, being 110% of its EBIT. So we are not troubled with Pangang Group Vanadium & Titanium Resources's debt use. 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. For example, we've discovered 1 warning sign for Pangang Group Vanadium & Titanium Resources that you should be aware of before investing here.

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.

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.