Nanjing Panda Electronics (SHSE:600775) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Nanjing Panda Electronics Company Limited (SHSE:600775) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanjing Panda Electronics

What Is Nanjing Panda Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Nanjing Panda Electronics had CN¥45.7m of debt, an increase on CN¥18.1m, over one year. But on the other hand it also has CN¥1.26b in cash, leading to a CN¥1.21b net cash position.

How Healthy Is Nanjing Panda Electronics' Balance Sheet?

We can see from the most recent balance sheet that Nanjing Panda Electronics had liabilities of CN¥1.75b falling due within a year, and liabilities of CN¥49.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.26b as well as receivables valued at CN¥1.53b due within 12 months. So it can boast CN¥978.1m more liquid assets than total liabilities.

This surplus suggests that Nanjing Panda Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanjing Panda Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nanjing Panda Electronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Nanjing Panda Electronics had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥2.8b. That's not what we would hope to see.

So How Risky Is Nanjing Panda Electronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Nanjing Panda Electronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥272m of cash and made a loss of CN¥305m. Given it only has net cash of CN¥1.21b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Nanjing Panda Electronics is showing 1 warning sign in our investment analysis , you should know about...

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.