Persistence Resources Group (HKG:2489) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Persistence Resources Group Ltd (HKG:2489) does carry debt. But is this debt a concern to shareholders?

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. 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. 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.

Check out our latest analysis for Persistence Resources Group

What Is Persistence Resources Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Persistence Resources Group had CN¥30.0m in debt in June 2024; about the same as the year before. But it also has CN¥661.3m in cash to offset that, meaning it has CN¥631.3m net cash.

How Healthy Is Persistence Resources Group's Balance Sheet?

The latest balance sheet data shows that Persistence Resources Group had liabilities of CN¥166.9m due within a year, and liabilities of CN¥67.0m falling due after that. Offsetting these obligations, it had cash of CN¥661.3m as well as receivables valued at -CN¥421.0k due within 12 months. So it can boast CN¥427.0m more liquid assets than total liabilities.

This excess liquidity suggests that Persistence Resources Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Persistence Resources Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Persistence Resources Group has increased its EBIT by 7.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Persistence Resources Group 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 company can only pay off debt with cold hard cash, not accounting profits. Persistence Resources Group 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, Persistence Resources Group produced sturdy free cash flow equating to 66% 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 Persistence Resources Group has CN¥631.3m in net cash and a decent-looking balance sheet. So is Persistence Resources Group's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Persistence Resources Group you should know about.

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.