Perfect Group International Holdings (HKG:3326) Has A Pretty 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 note that Perfect Group International Holdings Limited (HKG:3326) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Perfect Group International Holdings

How Much Debt Does Perfect Group International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Perfect Group International Holdings had HK$17.1m of debt in June 2023, down from HK$27.9m, one year before. But it also has HK$104.8m in cash to offset that, meaning it has HK$87.7m net cash.

How Healthy Is Perfect Group International Holdings' Balance Sheet?

The latest balance sheet data shows that Perfect Group International Holdings had liabilities of HK$167.0m due within a year, and liabilities of HK$29.8m falling due after that. On the other hand, it had cash of HK$104.8m and HK$105.7m worth of receivables due within a year. So it can boast HK$13.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Perfect Group International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Perfect Group International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Perfect Group International Holdings's load is not too heavy, because its EBIT was down 56% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Perfect Group International 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Perfect Group International Holdings 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 most recent three years, Perfect Group International Holdings recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Perfect Group International Holdings has HK$87.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in HK$59m. So we don't have any problem with Perfect Group International Holdings'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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Perfect Group International Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

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.