We Think Oppein Home Group (SHSE:603833) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Oppein Home Group Inc. (SHSE:603833) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Oppein Home Group

What Is Oppein Home Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Oppein Home Group had CN¥12.3b of debt, an increase on CN¥7.45b, over one year. But on the other hand it also has CN¥14.6b in cash, leading to a CN¥2.32b net cash position.

A Look At Oppein Home Group's Liabilities

We can see from the most recent balance sheet that Oppein Home Group had liabilities of CN¥15.0b falling due within a year, and liabilities of CN¥2.66b due beyond that. Offsetting these obligations, it had cash of CN¥14.6b as well as receivables valued at CN¥1.65b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.42b.

Since publicly traded Oppein Home Group shares are worth a total of CN¥28.9b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Another good sign is that Oppein Home Group has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Oppein Home Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Oppein Home Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Oppein Home Group recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥2.32b. And we liked the look of last year's 25% year-on-year EBIT growth. So is Oppein Home Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Oppein Home Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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