David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ningbo PIA Automation Holding Corp. (SHSE:688306) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ningbo PIA Automation Holding's Net Debt?
As you can see below, at the end of September 2023, Ningbo PIA Automation Holding had CN¥1.15b of debt, up from CN¥1.01b a year ago. Click the image for more detail. However, it also had CN¥877.2m in cash, and so its net debt is CN¥269.5m.
How Strong Is Ningbo PIA Automation Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ningbo PIA Automation Holding had liabilities of CN¥2.62b due within 12 months and liabilities of CN¥526.5m due beyond that. On the other hand, it had cash of CN¥877.2m and CN¥430.0m worth of receivables due within a year. So its liabilities total CN¥1.84b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Ningbo PIA Automation Holding has a market capitalization of CN¥4.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Ningbo PIA Automation Holding'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.
In the last year Ningbo PIA Automation Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥2.2b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Ningbo PIA Automation Holding still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥117m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥32m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Ningbo PIA Automation Holding I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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