Does Pak Fah Yeow International (HKG:239) Have A 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 can see that Pak Fah Yeow International Limited (HKG:239) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pak Fah Yeow International

How Much Debt Does Pak Fah Yeow International Carry?

You can click the graphic below for the historical numbers, but it shows that Pak Fah Yeow International had HK$13.9m of debt in June 2022, down from HK$17.4m, one year before. However, it does have HK$184.4m in cash offsetting this, leading to net cash of HK$170.5m.

A Look At Pak Fah Yeow International's Liabilities

Zooming in on the latest balance sheet data, we can see that Pak Fah Yeow International had liabilities of HK$51.5m due within 12 months and liabilities of HK$94.1m due beyond that. Offsetting these obligations, it had cash of HK$184.4m as well as receivables valued at HK$13.0m due within 12 months. So it actually has HK$51.8m more liquid assets than total liabilities.

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

Fortunately, Pak Fah Yeow International grew its EBIT by 4.0% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pak Fah Yeow International's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Pak Fah Yeow International 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. Over the last three years, Pak Fah Yeow International recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pak Fah Yeow International has HK$170.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$41m, being 100% of its EBIT. So we don't think Pak Fah Yeow International's use of debt is risky. 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 Pak Fah Yeow International has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.