Is OKG Technology Holdings (HKG:1499) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, OKG Technology Holdings Limited (HKG:1499) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for OKG Technology Holdings

How Much Debt Does OKG Technology Holdings Carry?

As you can see below, at the end of March 2024, OKG Technology Holdings had HK$980.7m of debt, up from HK$549.5m a year ago. Click the image for more detail. However, it also had HK$81.3m in cash, and so its net debt is HK$899.4m.

How Strong Is OKG Technology Holdings' Balance Sheet?

The latest balance sheet data shows that OKG Technology Holdings had liabilities of HK$1.17b due within a year, and liabilities of HK$108.0k falling due after that. Offsetting these obligations, it had cash of HK$81.3m as well as receivables valued at HK$98.3m due within 12 months. So it has liabilities totalling HK$986.1m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's HK$843.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 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 5.4%, to HK$337m. That's not what we would hope to see.

Caveat Emptor

Importantly, OKG Technology Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$43m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$44m. In the meantime, we consider the stock to be risky. For riskier companies like OKG Technology Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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