Is OKG Technology Holdings (HKG:1499) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that OKG Technology Holdings Limited (HKG:1499) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for OKG Technology Holdings

How Much Debt Does OKG Technology Holdings Carry?

As you can see below, OKG Technology Holdings had HK$97.6m of debt at September 2021, down from HK$145.1m a year prior. But on the other hand it also has HK$201.0m in cash, leading to a HK$103.4m net cash position.

How Healthy Is OKG Technology Holdings' Balance Sheet?

The latest balance sheet data shows that OKG Technology Holdings had liabilities of HK$310.9m due within a year, and liabilities of HK$5.76m falling due after that. On the other hand, it had cash of HK$201.0m and HK$171.4m worth of receivables due within a year. So it actually has HK$55.7m more liquid assets than total liabilities.

This short term liquidity is a sign that OKG Technology Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that OKG Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since OKG Technology Holdings will need earnings to service that debt. 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.

In the last year OKG Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 21%, to HK$408m. That makes us nervous, to say the least.

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$25m of cash and made a loss of HK$99m. But the saving grace is the HK$103.4m 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. For instance, we've identified 1 warning sign for OKG Technology Holdings that you should be aware of.

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.