Health Check: How Prudently Does Orient Group Incorporation (SHSE:600811) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Orient Group Incorporation (SHSE:600811) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Orient Group Incorporation

What Is Orient Group Incorporation's Net Debt?

The image below, which you can click on for greater detail, shows that Orient Group Incorporation had debt of CN¥16.2b at the end of September 2024, a reduction from CN¥18.4b over a year. On the flip side, it has CN¥1.41b in cash leading to net debt of about CN¥14.8b.

How Healthy Is Orient Group Incorporation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Orient Group Incorporation had liabilities of CN¥11.2b due within 12 months and liabilities of CN¥8.08b due beyond that. Offsetting this, it had CN¥1.41b in cash and CN¥2.82b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥15.0b.

This deficit casts a shadow over the CN¥8.31b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Orient Group Incorporation would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Orient Group Incorporation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Orient Group Incorporation made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 81%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Orient Group Incorporation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥188m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥1.3b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Orient Group Incorporation that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.