Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, China Oriented International Holdings Limited (HKG:1871) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for China Oriented International Holdings
How Much Debt Does China Oriented International Holdings Carry?
As you can see below, China Oriented International Holdings had CN¥45.2m of debt at June 2024, down from CN¥54.2m a year prior. However, it does have CN¥150.6m in cash offsetting this, leading to net cash of CN¥105.4m.
A Look At China Oriented International Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that China Oriented International Holdings had liabilities of CN¥64.8m due within 12 months and liabilities of CN¥16.2m due beyond that. On the other hand, it had cash of CN¥150.6m and CN¥552.0k worth of receivables due within a year. So it can boast CN¥70.1m more liquid assets than total liabilities.
This surplus strongly suggests that China Oriented International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China Oriented International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Oriented International Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year China Oriented International Holdings had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥35m. We would much prefer see growth.
So How Risky Is China Oriented International Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months China Oriented International Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥18m of cash and made a loss of CN¥7.5m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥105.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for China Oriented International Holdings (1 is a bit concerning) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.