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.' 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 PC Partner Group Limited (HKG:1263) does use debt in its business. But is this debt a concern to shareholders?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PC Partner Group

What Is PC Partner Group's Debt?

You can click the graphic below for the historical numbers, but it shows that PC Partner Group had HK$702.3m of debt in December 2021, down from HK$1.07b, one year before. However, its balance sheet shows it holds HK$4.33b in cash, so it actually has HK$3.63b net cash.

How Healthy Is PC Partner Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PC Partner Group had liabilities of HK$3.74b due within 12 months and liabilities of HK$95.2m due beyond that. Offsetting these obligations, it had cash of HK$4.33b as well as receivables valued at HK$744.6m due within 12 months. So it actually has HK$1.24b more liquid assets than total liabilities.

This surplus strongly suggests that PC Partner Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, PC Partner Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that PC Partner Group grew its EBIT by 1,369% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is PC Partner Group'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, a company can only pay off debt with cold hard cash, not accounting profits. While PC Partner 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. Happily for any shareholders, PC Partner Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that PC Partner Group has net cash of HK$3.63b, as well as more liquid assets than liabilities. The cherry on top was that in converted 468% of that EBIT to free cash flow, bringing in HK$6.9b. The bottom line is that we do not find PC Partner Group's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that PC Partner Group is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.