Is PanAsialum Holdings (HKG:2078) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, PanAsialum Holdings Company Limited (HKG:2078) does carry debt. 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 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. 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 PanAsialum Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 PanAsialum Holdings had HK$251.6m of debt, an increase on HK$210.6m, over one year. But it also has HK$369.0m in cash to offset that, meaning it has HK$117.4m net cash.

How Healthy Is PanAsialum Holdings' Balance Sheet?

The latest balance sheet data shows that PanAsialum Holdings had liabilities of HK$667.4m due within a year, and liabilities of HK$14.8m falling due after that. On the other hand, it had cash of HK$369.0m and HK$226.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$86.7m.

PanAsialum Holdings has a market capitalization of HK$168.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, PanAsialum Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is PanAsialum 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.

Check out our latest analysis for PanAsialum Holdings

Over 12 months, PanAsialum Holdings made a loss at the EBIT level, and saw its revenue drop to HK$917m, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is PanAsialum Holdings?

While PanAsialum Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$28m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 2 warning signs with PanAsialum Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.