Does Productive Technologies (HKG:650) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Productive Technologies Company Limited (HKG:650) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Productive Technologies

What Is Productive Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Productive Technologies had HK$130.6m of debt, an increase on HK$6.63m, over one year. But it also has HK$767.7m in cash to offset that, meaning it has HK$637.1m net cash.

A Look At Productive Technologies' Liabilities

According to the last reported balance sheet, Productive Technologies had liabilities of HK$692.9m due within 12 months, and liabilities of HK$98.3m due beyond 12 months. Offsetting this, it had HK$767.7m in cash and HK$117.2m in receivables that were due within 12 months. So it actually has HK$93.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Productive Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Productive Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Productive Technologies 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.

Over 12 months, Productive Technologies made a loss at the EBIT level, and saw its revenue drop to HK$471m, which is a fall of 6.9%. We would much prefer see growth.

So How Risky Is Productive Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Productive Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$295m and booked a HK$321m accounting loss. With only HK$637.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Productive Technologies is showing 2 warning signs in our investment analysis , 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.