These 4 Measures Indicate That Pangang Group Vanadium & Titanium Resources (SZSE:000629) Is Using Debt Reasonably Well

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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, 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 Pangang Group Vanadium & Titanium Resources

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

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Pangang Group Vanadium & Titanium Resources had CN¥129.4m of debt, an increase on CN¥95.9m, over one year. But on the other hand it also has CN¥4.32b in cash, leading to a CN¥4.19b net cash position.

A Look At Pangang Group Vanadium & Titanium Resources' Liabilities

We can see from the most recent balance sheet that Pangang Group Vanadium & Titanium Resources had liabilities of CN¥2.16b falling due within a year, and liabilities of CN¥636.1m due beyond that. Offsetting these obligations, it had cash of CN¥4.32b as well as receivables valued at CN¥934.8m due within 12 months. So it can boast CN¥2.45b more liquid assets than total liabilities.

This short term liquidity is a sign that Pangang Group Vanadium & Titanium Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pangang Group Vanadium & Titanium Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Pangang Group Vanadium & Titanium Resources's saving grace is its low debt levels, because its EBIT has tanked 20% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Pangang Group Vanadium & Titanium Resources generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Pangang Group Vanadium & Titanium Resources has net cash of CN¥4.19b, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in -CN¥217m. So we are not troubled with Pangang Group Vanadium & Titanium Resources's debt use. 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 Pangang Group Vanadium & Titanium Resources that you should be aware of before investing here.

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.