Is PINE Technology Holdings (HKG:1079) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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 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.

See 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 it also has US$10.1m in cash to offset that, meaning it has US$8.26m net cash.

How Strong Is PINE Technology Holdings' Balance Sheet?

According to the last reported balance sheet, PINE Technology Holdings had liabilities of US$4.81m due within 12 months, and liabilities of US$1.45m due beyond 12 months. 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 can boast US$15.2m more liquid assets than total liabilities.

This surplus liquidity suggests that PINE Technology Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 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$8.8m. That makes us nervous, to say the least.

So How Risky Is PINE Technology Holdings?

While PINE Technology Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$646k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example PINE Technology Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) 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.