Here's Why Pan Asia Environmental Protection Group (HKG:556) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Pan Asia Environmental Protection Group Limited (HKG:556) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Pan Asia Environmental Protection Group

What Is Pan Asia Environmental Protection Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Pan Asia Environmental Protection Group had CN¥50.5m of debt in June 2023, down from CN¥89.4m, one year before. However, its balance sheet shows it holds CN¥1.20b in cash, so it actually has CN¥1.15b net cash.

A Look At Pan Asia Environmental Protection Group's Liabilities

According to the last reported balance sheet, Pan Asia Environmental Protection Group had liabilities of CN¥97.5m due within 12 months, and liabilities of CN¥51.5m due beyond 12 months. On the other hand, it had cash of CN¥1.20b and CN¥59.4m worth of receivables due within a year. So it actually has 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Pan Asia Environmental Protection Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Pan Asia Environmental Protection Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥11m in EBIT over the last twelve months. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Over the last year, 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¥1.15b in net cash and a strong balance sheet. So we are not troubled with Pan Asia Environmental Protection Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Pan Asia Environmental Protection Group is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.