Is Pci Technology GroupLtd (SHSE:600728) Using Debt In A Risky Way?

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 can see that Pci Technology Group Co.,Ltd. (SHSE:600728) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pci Technology GroupLtd

How Much Debt Does Pci Technology GroupLtd Carry?

The image below, which you can click on for greater detail, shows that Pci Technology GroupLtd had debt of CN¥217.6m at the end of March 2024, a reduction from CN¥325.0m over a year. But on the other hand it also has CN¥1.84b in cash, leading to a CN¥1.63b net cash position.

How Healthy Is Pci Technology GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Pci Technology GroupLtd had liabilities of CN¥5.24b falling due within a year, and liabilities of CN¥279.0m due beyond that. Offsetting this, it had CN¥1.84b in cash and CN¥4.82b in receivables that were due within 12 months. So it can boast CN¥1.15b more liquid assets than total liabilities.

This surplus suggests that Pci Technology GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pci Technology GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pci Technology GroupLtd'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.

In the last year Pci Technology GroupLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥6.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Pci Technology GroupLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Pci Technology GroupLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥17m of cash and made a loss of CN¥1.1b. With only CN¥1.63b 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. For riskier companies like Pci Technology GroupLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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