PC Partner Group (HKG:1263) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, PC Partner Group Limited (HKG:1263) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PC Partner Group

What Is PC Partner Group's Debt?

You can click the graphic below for the historical numbers, but it shows that PC Partner Group had HK$792.2m of debt in June 2021, down from HK$1.34b, one year before. However, it does have HK$2.24b in cash offsetting this, leading to net cash of HK$1.45b.

How Healthy Is PC Partner Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PC Partner Group had liabilities of HK$3.40b due within 12 months and liabilities of HK$101.8m due beyond that. Offsetting this, it had HK$2.24b in cash and HK$1.10b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$164.6m.

Of course, PC Partner Group has a market capitalization of HK$3.83b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, PC Partner Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that PC Partner Group grew its EBIT by 726% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PC Partner Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While PC Partner Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, PC Partner Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about PC Partner Group's liabilities, but we can be reassured by the fact it has has net cash of HK$1.45b. And it impressed us with free cash flow of HK$6.1b, being 553% of its EBIT. So is PC Partner Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 4 warning signs for PC Partner Group 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.

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.

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