Pipeline Engineering Holdings (HKG:1865) 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.' 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 Pipeline Engineering Holdings Limited (HKG:1865) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Pipeline Engineering Holdings

What Is Pipeline Engineering Holdings's Net Debt?

As you can see below, at the end of September 2020, Pipeline Engineering Holdings had S$10.3m of debt, up from S$444.0k a year ago. Click the image for more detail. But it also has S$19.8m in cash to offset that, meaning it has S$9.51m net cash.

How Strong Is Pipeline Engineering Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pipeline Engineering Holdings had liabilities of S$5.96m due within 12 months and liabilities of S$15.6m due beyond that. On the other hand, it had cash of S$19.8m and S$7.15m worth of receivables due within a year. So it can boast S$5.35m more liquid assets than total liabilities.

This surplus suggests that Pipeline Engineering Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Pipeline Engineering Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Pipeline Engineering Holdings 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 Pipeline Engineering Holdings had a loss before interest and tax, and actually shrunk its revenue by 24%, to S$22m. To be frank that doesn't bode well.

So How Risky Is Pipeline Engineering Holdings?

While Pipeline Engineering Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$8.8m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Pipeline Engineering Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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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