We Think Palasino Holdings (HKG:2536) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Palasino Holdings Limited (HKG:2536) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Palasino Holdings Carry?

The image below, which you can click on for greater detail, shows that Palasino Holdings had debt of HK$53.6m at the end of March 2025, a reduction from HK$61.5m over a year. However, it does have HK$293.1m in cash offsetting this, leading to net cash of HK$239.5m.

How Strong Is Palasino Holdings' Balance Sheet?

We can see from the most recent balance sheet that Palasino Holdings had liabilities of HK$91.5m falling due within a year, and liabilities of HK$120.1m due beyond that. On the other hand, it had cash of HK$293.1m and HK$20.0m worth of receivables due within a year. So it can boast HK$101.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Palasino Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Palasino Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Palasino Holdings

In fact Palasino Holdings's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Palasino 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 Palasino 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. During the last three years, Palasino Holdings produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. 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 Palasino Holdings has HK$239.5m in net cash and a decent-looking balance sheet. So we are not troubled with Palasino Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Palasino Holdings has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.