Here's Why Putian Communication Group (HKG:1720) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Putian Communication Group Limited (HKG:1720) makes use of debt. But the real question is whether this debt is making the company risky.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Putian Communication Group's Net Debt?

As you can see below, Putian Communication Group had CN¥311.9m of debt at December 2024, down from CN¥341.2m a year prior. However, it does have CN¥58.2m in cash offsetting this, leading to net debt of about CN¥253.7m.

A Look At Putian Communication Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Putian Communication Group had liabilities of CN¥430.8m due within 12 months and liabilities of CN¥124.2m due beyond that. On the other hand, it had cash of CN¥58.2m and CN¥534.2m worth of receivables due within a year. So it actually has CN¥37.4m more liquid assets than total liabilities.

This luscious liquidity implies that Putian Communication Group's 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.

View our latest analysis for Putian Communication Group

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Putian Communication Group's debt to EBITDA ratio (3.7) suggests that it uses some debt, its interest cover is very weak, at 1.4, suggesting high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. On a slightly more positive note, Putian Communication Group grew its EBIT at 20% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Putian Communication Group's earnings that will influence how the balance sheet holds up in the future. 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 .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Putian Communication Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Putian Communication Group's conversion of EBIT to free cash flow was a real negative on this analysis, as was its interest cover. But like a ballerina ending on a perfect pirouette, it has not trouble staying on top of its total liabilities. Looking at all this data makes us feel a little cautious about Putian Communication Group's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. For instance, we've identified 4 warning signs for Putian Communication Group (3 are potentially serious) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.