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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Pan Asia Environmental Protection Group Limited (HKG:556) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its 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 Pan Asia Environmental Protection Group had CN¥32.7m of debt in December 2023, down from CN¥47.5m, one year before. However, it does have CN¥1.24b in cash offsetting this, leading to net cash of CN¥1.20b.

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

According to the last reported balance sheet, Pan Asia Environmental Protection Group had liabilities of CN¥133.6m due within 12 months, and liabilities of CN¥21.6m due beyond 12 months. Offsetting this, it had CN¥1.24b in cash and CN¥52.5m in receivables that were due within 12 months. So it actually has CN¥1.13b more liquid assets than total liabilities.

This luscious liquidity implies that Pan Asia Environmental Protection Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Pan Asia Environmental Protection Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Pan Asia Environmental Protection Group's EBIT launched higher than Elon Musk, gaining a whopping 234% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pan Asia Environmental Protection Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pan Asia Environmental Protection Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Pan Asia Environmental Protection Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far 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¥1.20b in net cash and a strong balance sheet. And it impressed us with its EBIT growth of 234% over the last year. So is Pan Asia Environmental Protection Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Pan Asia Environmental Protection Group you should be aware of, and 1 of them is a bit unpleasant.

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. 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.