Is PINE Technology Holdings (HKG:1079) Using Debt In A Risky Way?

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 can see that PINE Technology Holdings Limited (HKG:1079) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PINE Technology Holdings

What Is PINE Technology Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that PINE Technology Holdings had debt of US$6.11m at the end of December 2020, a reduction from US$12.0m over a year. However, its balance sheet shows it holds US$11.9m in cash, so it actually has US$5.82m net cash.

How Strong Is PINE Technology Holdings' Balance Sheet?

The latest balance sheet data shows that PINE Technology Holdings had liabilities of US$8.51m due within a year, and liabilities of US$2.55m falling due after that. On the other hand, it had cash of US$11.9m and US$13.4m worth of receivables due within a year. So it actually has US$14.2m more liquid assets than total liabilities.

This surplus strongly suggests that PINE Technology Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that PINE Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is PINE Technology Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year PINE Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 78%, to US$41m. To be frank that doesn't bode well.

So How Risky Is PINE Technology Holdings?

Although PINE Technology Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$4.5m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. 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 3 warning signs for PINE Technology Holdings (of which 1 is potentially serious!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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