Precious Dragon Technology Holdings (HKG:1861) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Precious Dragon Technology Holdings Limited (HKG:1861) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Precious Dragon Technology Holdings

How Much Debt Does Precious Dragon Technology Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Precious Dragon Technology Holdings had HK$89.1m of debt in June 2023, down from HK$141.1m, one year before. But on the other hand it also has HK$110.9m in cash, leading to a HK$21.8m net cash position.

How Healthy Is Precious Dragon Technology Holdings' Balance Sheet?

According to the last reported balance sheet, Precious Dragon Technology Holdings had liabilities of HK$134.4m due within 12 months, and liabilities of HK$67.9m due beyond 12 months. Offsetting these obligations, it had cash of HK$110.9m as well as receivables valued at HK$32.4m due within 12 months. So it has liabilities totalling HK$58.9m more than its cash and near-term receivables, combined.

Of course, Precious Dragon Technology Holdings has a market capitalization of HK$357.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Precious Dragon Technology Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Precious Dragon Technology Holdings grew its EBIT by 89% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Precious Dragon Technology Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Precious Dragon Technology 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, Precious Dragon Technology Holdings recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Precious Dragon Technology Holdings does have more liabilities than liquid assets, it also has net cash of HK$21.8m. And it impressed us with its EBIT growth of 89% over the last year. So is Precious Dragon Technology Holdings's debt a risk? It doesn't seem so to us. 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 instance, we've identified 4 warning signs for Precious Dragon Technology Holdings (2 are a bit unpleasant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.