Health Check: How Prudently Does OKG Technology Holdings (HKG:1499) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies OKG Technology Holdings Limited (HKG:1499) makes use of debt. But is this debt a concern to shareholders?

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. 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, 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.

See our latest analysis for OKG Technology Holdings

What Is OKG Technology Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 OKG Technology Holdings had debt of HK$148.2m, up from HK$141.8m in one year. However, it does have HK$265.3m in cash offsetting this, leading to net cash of HK$117.1m.

A Look At OKG Technology Holdings' Liabilities

According to the last reported balance sheet, OKG Technology Holdings had liabilities of HK$383.6m due within 12 months, and liabilities of HK$1.93m due beyond 12 months. On the other hand, it had cash of HK$265.3m and HK$166.9m worth of receivables due within a year. So it can boast HK$46.7m more liquid assets than total liabilities.

This surplus suggests that OKG Technology Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, OKG Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is OKG Technology Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, OKG Technology Holdings made a loss at the EBIT level, and saw its revenue drop to HK$453m, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is OKG Technology Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that OKG Technology Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$6.8m of cash and made a loss of HK$94m. But the saving grace is the HK$117.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with OKG Technology Holdings (at least 1 which makes us a bit uncomfortable) , 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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.