Productive Technologies (HKG:650) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Productive Technologies Company Limited (HKG:650) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Productive Technologies

How Much Debt Does Productive Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Productive Technologies had HK$261.1m of debt, an increase on HK$64.0m, over one year. But it also has HK$531.4m in cash to offset that, meaning it has HK$270.3m net cash.

How Strong Is Productive Technologies' Balance Sheet?

We can see from the most recent balance sheet that Productive Technologies had liabilities of HK$761.8m falling due within a year, and liabilities of HK$103.1m due beyond that. Offsetting these obligations, it had cash of HK$531.4m as well as receivables valued at HK$133.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$200.3m.

Since publicly traded Productive Technologies shares are worth a total of HK$1.52b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Productive Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Productive Technologies made a loss at the EBIT level, and saw its revenue drop to HK$544m, which is a fall of 4.2%. That's not what we would hope to see.

So How Risky Is Productive Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Productive Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$231m and booked a HK$347m accounting loss. However, it has net cash of HK$270.3m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 1 warning sign we've spotted with Productive Technologies .

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.