The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Pci Technology Group Co.,Ltd. (SHSE:600728) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

What Is Pci Technology GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Pci Technology GroupLtd had debt of CN¥315.2m, up from CN¥207.7m in one year. But it also has CN¥1.77b in cash to offset that, meaning it has CN¥1.46b net cash.

How Healthy Is Pci Technology GroupLtd's Balance Sheet?

The latest balance sheet data shows that Pci Technology GroupLtd had liabilities of CN¥5.58b due within a year, and liabilities of CN¥270.2m falling due after that. Offsetting this, it had CN¥1.77b in cash and CN¥4.90b in receivables that were due within 12 months. So it can boast CN¥821.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Pci Technology GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Pci Technology GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pci Technology GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Pci Technology GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 10%, to CN¥5.4b. That's not what we would hope to see.

So How Risky Is Pci Technology GroupLtd?

Although Pci Technology GroupLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥108m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with Pci Technology GroupLtd .

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.