Oriental Pearl GroupLtd (SHSE:600637) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Oriental Pearl Group Co.,Ltd. (SHSE:600637) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Oriental Pearl GroupLtd

How Much Debt Does Oriental Pearl GroupLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Oriental Pearl GroupLtd had CN¥2.23b of debt in September 2024, down from CN¥2.59b, one year before. But on the other hand it also has CN¥14.6b in cash, leading to a CN¥12.4b net cash position.

How Healthy Is Oriental Pearl GroupLtd's Balance Sheet?

According to the last reported balance sheet, Oriental Pearl GroupLtd had liabilities of CN¥6.93b due within 12 months, and liabilities of CN¥1.84b due beyond 12 months. On the other hand, it had cash of CN¥14.6b and CN¥2.61b worth of receivables due within a year. So it can boast CN¥8.42b more liquid assets than total liabilities.

This excess liquidity is a great indication that Oriental Pearl GroupLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Oriental Pearl GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Oriental Pearl GroupLtd grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Oriental Pearl GroupLtd 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 last two years, Oriental Pearl GroupLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Oriental Pearl GroupLtd has CN¥12.4b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 5.1% over the last year. So we are not troubled with Oriental Pearl GroupLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Oriental Pearl GroupLtd (of which 1 is concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.