Here's Why OKG Technology Holdings (HKG:1499) Can Afford Some Debt

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 OKG Technology Holdings Limited (HKG:1499) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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 OKG Technology Holdings

What Is OKG Technology Holdings's Net Debt?

As you can see below, at the end of March 2022, OKG Technology Holdings had HK$586.2m of debt, up from HK$148.5m a year ago. Click the image for more detail. On the flip side, it has HK$156.4m in cash leading to net debt of about HK$429.8m.

How Healthy Is OKG Technology Holdings' Balance Sheet?

According to the last reported balance sheet, OKG Technology Holdings had liabilities of HK$824.1m due within 12 months, and liabilities of HK$6.58m due beyond 12 months. On the other hand, it had cash of HK$156.4m and HK$100.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$573.5m.

OKG Technology Holdings has a market capitalization of HK$1.19b, so it could very likely raise cash to ameliorate 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. There's no doubt that we learn most about debt from the balance sheet. But it is OKG Technology Holdings'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.

In the last year OKG Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 15%, to HK$386m. That's not what we would hope to see.

Caveat Emptor

Not only did OKG Technology Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$72m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$58m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.