Pan-International Industrial (TPE:2328) Seems To Use Debt Rather Sparingly

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 note that Pan-International Industrial Corp. (TPE:2328) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

See our latest analysis for Pan-International Industrial

What Is Pan-International Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that Pan-International Industrial had NT$1.31b of debt in September 2020, down from NT$1.87b, one year before. However, it does have NT$6.86b in cash offsetting this, leading to net cash of NT$5.55b.

How Healthy Is Pan-International Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pan-International Industrial had liabilities of NT$7.26b due within 12 months and liabilities of NT$480.5m due beyond that. Offsetting these obligations, it had cash of NT$6.86b as well as receivables valued at NT$5.16b due within 12 months. So it actually has NT$4.28b more liquid assets than total liabilities.

This excess liquidity is a great indication that Pan-International Industrial's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Pan-International Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Pan-International Industrial's load is not too heavy, because its EBIT was down 41% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Pan-International Industrial'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Pan-International Industrial may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Pan-International Industrial actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Pan-International Industrial has NT$5.55b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.3b, being 138% of its EBIT. So we don't think Pan-International Industrial's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Pan-International Industrial you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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