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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Precious Dragon Technology Holdings Limited (HKG:1861) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Precious Dragon Technology Holdings
What Is Precious Dragon Technology Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Precious Dragon Technology Holdings had debt of HK$45.0m, up from HK$3.60m in one year. However, it does have HK$140.7m in cash offsetting this, leading to net cash of HK$95.7m.
How Strong Is Precious Dragon Technology Holdings's Balance Sheet?
According to the last reported balance sheet, Precious Dragon Technology Holdings had liabilities of HK$101.6m due within 12 months, and liabilities of HK$48.6m due beyond 12 months. Offsetting this, it had HK$140.7m in cash and HK$45.1m in receivables that were due within 12 months. So it actually has HK$35.6m more liquid assets than total liabilities.
This surplus suggests that Precious Dragon Technology Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Precious Dragon Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Precious Dragon Technology Holdings has increased its EBIT by 4.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Precious Dragon Technology Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.