Is PanAsialum Holdings (HKG:2078) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that PanAsialum Holdings Company Limited (HKG:2078) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PanAsialum Holdings

How Much Debt Does PanAsialum Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that PanAsialum Holdings had HK$217.4m of debt in June 2023, down from HK$521.9m, one year before. On the flip side, it has HK$197.9m in cash leading to net debt of about HK$19.4m.

A Look At PanAsialum Holdings' Liabilities

According to the last reported balance sheet, PanAsialum Holdings had liabilities of HK$357.8m due within 12 months, and liabilities of HK$354.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$197.9m as well as receivables valued at HK$199.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$314.3m.

This deficit casts a shadow over the HK$132.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, PanAsialum Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is PanAsialum Holdings'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.

Over 12 months, PanAsialum Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.1b, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While PanAsialum Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$144m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of HK$105m. In the meantime, we consider the stock to be risky. 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. For example - PanAsialum Holdings has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.