Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Guangzhou Pearl River Piano Group Co.,Ltd (SZSE:002678) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Guangzhou Pearl River Piano GroupLtd's Net Debt?
The image below, which you can click on for greater detail, shows that Guangzhou Pearl River Piano GroupLtd had debt of CN¥418.5m at the end of September 2023, a reduction from CN¥550.9m over a year. However, it does have CN¥1.53b in cash offsetting this, leading to net cash of CN¥1.12b.
A Look At Guangzhou Pearl River Piano GroupLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Guangzhou Pearl River Piano GroupLtd had liabilities of CN¥945.5m due within 12 months and liabilities of CN¥115.5m due beyond that. On the other hand, it had cash of CN¥1.53b and CN¥277.8m worth of receivables due within a year. So it can boast CN¥750.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Guangzhou Pearl River Piano GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Guangzhou Pearl River Piano 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 Guangzhou Pearl River Piano GroupLtd's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, Guangzhou Pearl River Piano GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 29%. To be frank that doesn't bode well.
So How Risky Is Guangzhou Pearl River Piano GroupLtd?
While Guangzhou Pearl River Piano GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥29m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Guangzhou Pearl River Piano GroupLtd (including 1 which shouldn't be ignored) .
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.