Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that Pan Asia Data Holdings Inc. (HKG: 1561) uses debt in his business. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Pan Asia Data Holdings
What is the net debt of Pan Asia Data Holdings?
As you can see below, at the end of June 2021, Pan Asia Data Holdings was in debt of HK $ 717.0 million, up from HK $ 670.2 million a year ago. Click on the image for more details. However, he has HK $ 244.7million in cash offsetting this, leading to net debt of around HK $ 472.3million.
How healthy is Pan Asia Data Holdings’ balance sheet?
According to the latest published balance sheet, Pan Asia Data Holdings had a liability of HK $ 1.13 billion due within 12 months and a liability of HK $ 71.1 million due beyond 12 months. In return, he had HK $ 244.7 million in cash and HK $ 316.9 million in receivables due within 12 months. It therefore has liabilities totaling HK $ 640.8 million more than its cash and short-term receivables combined.
Pan Asia Data Holdings has a market capitalization of HK $ 1.98 billion, so it could most likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the earnings of Pan Asia Data Holdings that will influence balance sheet performance in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
In the past year, Pan Asia Data Holdings has incurred a loss before interest and taxes, and in fact reduced its revenue by 48%, to HK $ 471 million. It makes us nervous, to say the least.
While Pan Asia Data Holdings’ decline in revenue is about as heartwarming as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. To be precise, the EBIT loss amounted to HK $ 131 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that HK $ 59 million has been lost in negative free cash flow over the past twelve months. So, to be frank, we think it’s risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 2 warning signs for Pan Asia Data Holdings (1 cannot be ignored!) Which you should be aware of before investing here.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
If you decide to trade Pan Asia Data Holdings, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.Promoted