Is Pan Hong Holdings Group (SGX:P36) Using Too Much Debt?

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. Importantly, Pan Hong Holdings Group Limited (SGX:P36) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Pan Hong Holdings Group

What Is Pan Hong Holdings Group's Debt?

The image below, which you can click on for greater detail, shows that Pan Hong Holdings Group had debt of CN¥119.6m at the end of September 2023, a reduction from CN¥347.1m over a year. But on the other hand it also has CN¥226.9m in cash, leading to a CN¥107.2m net cash position.

A Look At Pan Hong Holdings Group's Liabilities

We can see from the most recent balance sheet that Pan Hong Holdings Group had liabilities of CN¥1.28b falling due within a year, and liabilities of CN¥19.2m due beyond that. On the other hand, it had cash of CN¥226.9m and CN¥107.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥961.9m.

The deficiency here weighs heavily on the CN¥222.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Pan Hong Holdings Group would likely require a major re-capitalisation if it had to pay its creditors today. Pan Hong Holdings Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Although Pan Hong Holdings Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥26m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Pan Hong Holdings 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Pan Hong Holdings Group 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. Over the last year, Pan Hong Holdings Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Pan Hong Holdings Group does have more liabilities than liquid assets, it also has net cash of CN¥107.2m. And it impressed us with free cash flow of CN¥253m, being 976% of its EBIT. So although we see some areas for improvement, we're not too worried about Pan Hong Holdings Group's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Pan Hong Holdings Group that you should be aware of before investing here.

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.