Does Oppein Home Group (SHSE:603833) Have A Healthy Balance Sheet?

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 note that Oppein Home Group Inc. (SHSE:603833) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. 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 Oppein Home Group

What Is Oppein Home Group's Debt?

As you can see below, at the end of September 2023, Oppein Home Group had CN¥9.28b of debt, up from CN¥6.58b a year ago. Click the image for more detail. But on the other hand it also has CN¥12.4b in cash, leading to a CN¥3.12b net cash position.

How Strong Is Oppein Home Group's Balance Sheet?

The latest balance sheet data shows that Oppein Home Group had liabilities of CN¥12.6b due within a year, and liabilities of CN¥3.06b falling due after that. Offsetting these obligations, it had cash of CN¥12.4b as well as receivables valued at CN¥1.89b due within 12 months. So its liabilities total CN¥1.41b more than the combination of its cash and short-term receivables.

Since publicly traded Oppein Home Group shares are worth a total of CN¥39.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Oppein Home Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Oppein Home Group grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Oppein Home Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Oppein Home Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Oppein Home Group recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Oppein Home Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.12b. And it impressed us with free cash flow of CN¥2.0b, being 76% of its EBIT. So is Oppein Home Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Oppein Home Group .

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.