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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Prinx Chengshan (Cayman) Holding Limited (HKG:1809) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Prinx Chengshan (Cayman) Holding
How Much Debt Does Prinx Chengshan (Cayman) Holding Carry?
As you can see below, Prinx Chengshan (Cayman) Holding had CN¥357.0m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥1.10b in cash, leading to a CN¥738.4m net cash position.
How Strong Is Prinx Chengshan (Cayman) Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Prinx Chengshan (Cayman) Holding had liabilities of CN¥2.32b due within 12 months and liabilities of CN¥91.9m due beyond that. On the other hand, it had cash of CN¥1.10b and CN¥1.05b worth of receivables due within a year. So it has liabilities totalling CN¥271.6m more than its cash and near-term receivables, combined.
Given Prinx Chengshan (Cayman) Holding has a market capitalization of CN¥4.23b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Prinx Chengshan (Cayman) Holding boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Prinx Chengshan (Cayman) Holding saw its EBIT drop by 2.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Prinx Chengshan (Cayman) Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.