Here's Why Pangang Group Vanadium & Titanium Resources (SZSE:000629) Can Manage Its Debt Responsibly

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. We note that Pangang Group Vanadium & Titanium Resources Co., Ltd. (SZSE:000629) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Pangang Group Vanadium & Titanium Resources

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

As you can see below, Pangang Group Vanadium & Titanium Resources had CN¥109.1m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥1.07b in cash, leading to a CN¥961.3m net cash position.

How Healthy Is Pangang Group Vanadium & Titanium Resources' Balance Sheet?

According to the last reported balance sheet, Pangang Group Vanadium & Titanium Resources had liabilities of CN¥2.02b due within 12 months, and liabilities of CN¥632.1m due beyond 12 months. Offsetting this, it had CN¥1.07b in cash and CN¥1.04b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥549.2m.

Of course, Pangang Group Vanadium & Titanium Resources has a market capitalization of CN¥21.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Pangang Group Vanadium & Titanium Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Pangang Group Vanadium & Titanium Resources's load is not too heavy, because its EBIT was down 35% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pangang Group Vanadium & Titanium Resources can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pangang Group Vanadium & Titanium Resources may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Pangang Group Vanadium & Titanium Resources produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Pangang Group Vanadium & Titanium Resources's liabilities, but we can be reassured by the fact it has has net cash of CN¥961.3m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in -CN¥153m. So we don't have any problem with Pangang Group Vanadium & Titanium Resources's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Pangang Group Vanadium & Titanium Resources, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.