Stock Analysis

Is PanAsialum Holdings (HKG:2078) Weighed On By Its Debt Load?

SEHK:2078
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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.' 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. As with many other companies PanAsialum Holdings Company Limited (HKG:2078) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 as of December 2020 PanAsialum Holdings had HK$1.83b of debt, an increase on HK$1.53b, over one year. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
SEHK:2078 Debt to Equity History March 31st 2021

How Healthy Is PanAsialum Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PanAsialum Holdings had liabilities of HK$2.69b due within 12 months and liabilities of HK$91.9m due beyond that. Offsetting these obligations, it had cash of HK$26.7m as well as receivables valued at HK$394.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.36b.

This deficit casts a shadow over the HK$492.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, PanAsialum Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 reported revenue of HK$1.8b, which is a gain of 5.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, PanAsialum Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$234m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through HK$102m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PanAsialum Holdings is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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