These 4 Measures Indicate That Plover Bay Technologies (HKG:1523) Is Using Debt Safely

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 Plover Bay Technologies Limited (HKG:1523) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Plover Bay Technologies

What Is Plover Bay Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Plover Bay Technologies had US$3.38m of debt, an increase on US$393.0k, over one year. But it also has US$32.5m in cash to offset that, meaning it has US$29.2m net cash.

How Healthy Is Plover Bay Technologies' Balance Sheet?

The latest balance sheet data shows that Plover Bay Technologies had liabilities of US$20.9m due within a year, and liabilities of US$2.56m falling due after that. Offsetting this, it had US$32.5m in cash and US$7.08m in receivables that were due within 12 months. So it can boast US$16.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Plover Bay Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Plover Bay Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Plover Bay Technologies grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Plover Bay Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Plover Bay Technologies 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. Happily for any shareholders, Plover Bay Technologies actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Plover Bay Technologies has US$29.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in US$15m. So we don't think Plover Bay Technologies's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Plover Bay Technologies that you should be aware of.

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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This article by Simply Wall St is general in nature. 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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