Does Pan Asia Environmental Protection Group (HKG:556) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Pan Asia Environmental Protection Group Limited (HKG:556) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Pan Asia Environmental Protection Group

What Is Pan Asia Environmental Protection Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Pan Asia Environmental Protection Group had CN¥47.5m of debt, an increase on CN¥44.3m, over one year. However, it does have CN¥1.20b in cash offsetting this, leading to net cash of CN¥1.16b.

How Strong Is Pan Asia Environmental Protection Group's Balance Sheet?

The latest balance sheet data shows that Pan Asia Environmental Protection Group had liabilities of CN¥84.4m due within a year, and liabilities of CN¥47.5m falling due after that. On the other hand, it had cash of CN¥1.20b and CN¥47.5m worth of receivables due within a year. So it can boast CN¥1.12b more liquid assets than total liabilities.

This excess liquidity is a great indication that Pan Asia Environmental Protection Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Pan Asia Environmental Protection Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Pan Asia Environmental Protection Group turned things around in the last 12 months, delivering and EBIT of CN¥3.8m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pan Asia Environmental Protection Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Pan Asia Environmental Protection Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Pan Asia Environmental Protection Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pan Asia Environmental Protection Group has CN¥1.16b in net cash and a strong balance sheet. So we don't have any problem with Pan Asia Environmental Protection Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Pan Asia Environmental Protection Group that you should be aware of before investing here.

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.