Pacific Textiles Holdings (HKG:1382) Seems To Use Debt Quite Sensibly

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.' 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. We note that Pacific Textiles Holdings Limited (HKG:1382) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Pacific Textiles Holdings

How Much Debt Does Pacific Textiles Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Pacific Textiles Holdings had debt of HK$859.0m, up from HK$648.5m in one year. However, it does have HK$1.05b in cash offsetting this, leading to net cash of HK$195.1m.

How Healthy Is Pacific Textiles Holdings's Balance Sheet?

The latest balance sheet data shows that Pacific Textiles Holdings had liabilities of HK$1.72b due within a year, and liabilities of HK$237.8m falling due after that. Offsetting these obligations, it had cash of HK$1.05b as well as receivables valued at HK$1.02b due within 12 months. So it actually has HK$119.8m more liquid assets than total liabilities.

Having regard to Pacific Textiles Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$6.94b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Pacific Textiles Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Pacific Textiles Holdings's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pacific Textiles Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Pacific Textiles Holdings 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 three years, Pacific Textiles Holdings produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Pacific Textiles Holdings has HK$195.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$459m, being 72% of its EBIT. So we don't have any problem with Pacific Textiles Holdings's use of debt. 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. Take risks, for example - Pacific Textiles Holdings has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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