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 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 Nanjing Panda Electronics Company Limited (SHSE:600775) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Nanjing Panda Electronics's Net Debt?
As you can see below, at the end of September 2023, Nanjing Panda Electronics had CN¥18.1m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.39b in cash to offset that, meaning it has CN¥1.37b net cash.
How Healthy Is Nanjing Panda Electronics' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nanjing Panda Electronics had liabilities of CN¥1.81b due within 12 months and liabilities of CN¥57.6m due beyond that. On the other hand, it had cash of CN¥1.39b and CN¥1.39b worth of receivables due within a year. So it can boast CN¥902.1m more liquid assets than total liabilities.
This surplus suggests that Nanjing Panda Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nanjing Panda Electronics 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 ultimately the future profitability of the business will decide if Nanjing Panda Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Nanjing Panda Electronics had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥3.2b. That makes us nervous, to say the least.
So How Risky Is Nanjing Panda Electronics?
Although Nanjing Panda Electronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥4.6m. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Nanjing Panda Electronics (of which 1 is significant!) you should know about.
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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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.