Would Piesat Information Technology (SHSE:688066) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Piesat Information Technology Co., Ltd. (SHSE:688066) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Piesat Information Technology

How Much Debt Does Piesat Information Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Piesat Information Technology had CN¥2.53b of debt, an increase on CN¥1.97b, over one year. On the flip side, it has CN¥609.7m in cash leading to net debt of about CN¥1.92b.

A Look At Piesat Information Technology's Liabilities

We can see from the most recent balance sheet that Piesat Information Technology had liabilities of CN¥2.71b falling due within a year, and liabilities of CN¥1.45b due beyond that. Offsetting these obligations, it had cash of CN¥609.7m as well as receivables valued at CN¥2.23b due within 12 months. So its liabilities total CN¥1.32b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Piesat Information Technology has a market capitalization of CN¥3.77b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Piesat Information Technology'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.

Over 12 months, Piesat Information Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Piesat Information Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥486m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥667m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Piesat Information Technology is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com