We Think Orient International Enterprise (SHSE:600278) Can Stay On Top Of Its Debt

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 Orient International Enterprise, Ltd. (SHSE:600278) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Orient International Enterprise

How Much Debt Does Orient International Enterprise Carry?

As you can see below, at the end of June 2024, Orient International Enterprise had CN¥631.0m of debt, up from CN¥386.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥4.97b in cash, leading to a CN¥4.34b net cash position.

How Strong Is Orient International Enterprise's Balance Sheet?

According to the last reported balance sheet, Orient International Enterprise had liabilities of CN¥9.02b due within 12 months, and liabilities of CN¥415.2m due beyond 12 months. Offsetting this, it had CN¥4.97b in cash and CN¥2.91b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.55b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Orient International Enterprise is worth CN¥6.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Orient International Enterprise also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Orient International Enterprise's load is not too heavy, because its EBIT was down 50% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Orient International Enterprise's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Orient International Enterprise 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. Happily for any shareholders, Orient International Enterprise actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Orient International Enterprise's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥4.34b. And it impressed us with free cash flow of CN¥233m, being 117% of its EBIT. So we are not troubled with Orient International Enterprise's debt use. 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 example - Orient International Enterprise has 2 warning signs we think 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.