These 4 metrics indicate that Pizu Group Holdings (HKG:8053) is making extensive use of debt
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Pizu Group Holdings Limited (HKG:8053) uses debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Pizu Group Holdings
How much debt does Pizu Group Holdings have?
You can click on the graph below for historical figures, but it shows that in September 2021, Pizu Group Holdings had 1.01 billion yen in debt, an increase of 322.7 million yen, year-on-year. However, he also had 431.5 million yen in cash, so his net debt is 577.0 million yen.
How strong is Pizu Group Holdings’ balance sheet?
The latest balance sheet data shows that Pizu Group Holdings had liabilities of 1.06 billion yen maturing within one year, and liabilities of 664.6 million yen maturing thereafter. On the other hand, it had liquid assets of 431.5 million Canadian yen and 790.7 million national yen of receivables due within one year. Thus, its liabilities total 499.5 million Canadian yen more than the combination of its cash and short-term receivables.
This shortfall is not that bad as Pizu Group Holdings is worth 1.24 billion Canadian yen and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Pizu Group Holdings has a low net debt to EBITDA ratio of just 1.3. And its EBIT covers its interest charges 23.9 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Its low leverage may become crucial for Pizu Group Holdings if management cannot prevent a repeat of the 32% reduction in EBIT over the past year. When a company sees its profit reservoir, it can sometimes find its relationship with its lenders soured. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Pizu Group Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Pizu Group Holdings has produced strong free cash flow equivalent to 61% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
Our point of view
Neither the ability of Pizu Group Holdings to increase its EBIT nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is that it seems to be able to easily cover its interest costs with its EBIT. We think Pizu Group Holdings’ debt makes it a bit risky, after looking at the aforementioned data points together. Not all risk is bad, as it can increase stock price returns if it pays off, but this leverage risk is worth keeping in mind. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 5 warning signs for Pizu Group Holdings of which you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.