Here's Why Oriental Pearl GroupLtd (SHSE:600637) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Oriental Pearl Group Co.,Ltd. (SHSE:600637) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Oriental Pearl GroupLtd

What Is Oriental Pearl GroupLtd's Debt?

As you can see below, at the end of March 2024, Oriental Pearl GroupLtd had CN¥3.16b of debt, up from CN¥2.28b a year ago. Click the image for more detail. But it also has CN¥18.3b in cash to offset that, meaning it has CN¥15.2b net cash.

A Look At Oriental Pearl GroupLtd's Liabilities

According to the last reported balance sheet, Oriental Pearl GroupLtd had liabilities of CN¥7.75b due within 12 months, and liabilities of CN¥1.98b due beyond 12 months. Offsetting this, it had CN¥18.3b in cash and CN¥2.61b in receivables that were due within 12 months. So it can boast CN¥11.2b more liquid assets than total liabilities.

This surplus strongly suggests that Oriental Pearl GroupLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Oriental Pearl GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Oriental Pearl GroupLtd turned things around in the last 12 months, delivering and EBIT of CN¥529m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Oriental Pearl GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Oriental Pearl GroupLtd 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. During the last year, Oriental Pearl GroupLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Oriental Pearl GroupLtd has net cash of CN¥15.2b, as well as more liquid assets than liabilities. So we don't have any problem with Oriental Pearl GroupLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Oriental Pearl GroupLtd (1 is potentially serious!) that you should be aware of before investing here.

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.