Pan Hong Holdings Group (SGX:P36) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Pan Hong Holdings Group Limited (SGX:P36) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 at March 2023 Pan Hong Holdings Group had debt of CN¥315.6m, up from CN¥302.5m in one year. However, it does have CN¥212.3m in cash offsetting this, leading to net debt of about CN¥103.3m.

A Look At Pan Hong Holdings Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Pan Hong Holdings Group had liabilities of CN¥1.24b due within 12 months and liabilities of CN¥34.3m due beyond that. Offsetting this, it had CN¥212.3m in cash and CN¥115.6m in receivables that were due within 12 months. So its liabilities total CN¥949.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥269.0m company, like a colossus towering over mere mortals. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Pan Hong Holdings Group will need earnings to service that debt. 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.

In the last year Pan Hong Holdings Group had a loss before interest and tax, and actually shrunk its revenue by 90%, to CN¥31m. That makes us nervous, to say the least.

Caveat Emptor

While Pan Hong Holdings Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥7.7m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥6.3m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 3 warning signs for Pan Hong Holdings Group (1 is 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.

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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.