Is Pinlive Foods (SZSE:300892) Taking Too Much Debt?

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 thinking about how risky a particular stock is It may be obvious that you need to consider debt, because too much debt can ruin a business. We can see that Pinlive Foods Co., Ltd. (SZSE:300892) uses debt in its business. But the more important question is: How much risk does this debt pose?

Why does debt pose risks?

Generally speaking, debt only becomes a real problem when a business cannot easily pay it off, either by raising capital or with its own cash flow. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. However, a more common (but still costly) situation is where a company must dilute shareholders at a cheap share price just to get debt under control. Of course, many companies use debt to finance their growth without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Pinlive Foods

How much debt does Pinlive Foods have?

The image below, which you can click on for more details, shows that Pinlive Foods had CN¥61.4m of debt as of September 2024, up from CN¥41.3m in one year. On the other hand, the company also has CN¥502.1m in cash, leading to a net cash position of CN¥440.7m.

How healthy is Pinlive Foods’ balance sheet?

The latest balance sheet data shows that Pinlive Foods had liabilities of CN¥174.2m within a year, and liabilities of CN¥59.0m falling due after that. Offsetting this, it had CN¥502.1m in cash and CN¥79.5m in receivables that were due within 12 months. So it has CN¥348.4m more liquid assets than in total Liabilities.

This surplus suggests that Pinlive Foods has a conservative balance sheet and could probably reduce its debt without much difficulty. In short, Pinlive Foods has net cash, so it’s fair to say that the company doesn’t have a huge debt load! There is no doubt that the balance sheet is where we learn the most about debt. But you can’t look at debt in complete isolation; as Pinlive Foods will need revenue to service this debt. So when thinking about debt, it’s definitely worth taking a look at earnings performance. Click here for an interactive snapshot.

Over 12 months, Pinlive Foods made a loss at the EBIT level and saw revenue fall to CN¥899 million, a decline of 27%. To be honest, this doesn’t bode well.

How risky is Pinlive Foods?

Although Pinlive Foods recorded earnings before interest and taxes (EBIT) in the last twelve months, the company generated positive free cash flow of CN¥64 million. So even though it is loss-making, it doesn’t seem to have too much balance sheet risk in the near term if you keep an eye on net cash. Given the weak sales growth, we will feel more comfortable with the stock once EBIT is positive. There is no doubt that the balance sheet is where we learn the most about debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Note that Pinlive Foods appears 2 warning signs in our investment analysis you should know that…

If you’re the kind of investor who prefers buying stocks without the burden of debt, then don’t hesitate to explore our exclusive list of net cash growth stocks today.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.