Is PINE Technology Holdings (HKG:1079) Using Too Much Debt?

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.' 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 PINE Technology Holdings Limited (HKG:1079) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PINE Technology Holdings

What Is PINE Technology Holdings's Debt?

The image below, which you can click on for greater detail, shows that PINE Technology Holdings had debt of US$1.83m at the end of December 2021, a reduction from US$6.11m over a year. But on the other hand it also has US$10.1m in cash, leading to a US$8.26m net cash position.

How Healthy Is PINE Technology Holdings' Balance Sheet?

The latest balance sheet data shows that PINE Technology Holdings had liabilities of US$4.81m due within a year, and liabilities of US$1.45m falling due after that. Offsetting these obligations, it had cash of US$10.1m as well as receivables valued at US$11.3m due within 12 months. So it actually has US$15.2m more liquid assets than total liabilities.

This luscious liquidity implies that PINE Technology Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PINE Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PINE 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.

In the last year PINE Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 78%, to US$8.8m. 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$7.0m. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for PINE Technology Holdings (of which 1 doesn't sit too well with us!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.