Is China Oral Industry Group Holdings (HKG:8406) Using Debt Sensibly?

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. As with many other companies China Oral Industry Group Holdings Limited (HKG:8406) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

View our latest analysis for China Oral Industry Group Holdings

What Is China Oral Industry Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 China Oral Industry Group Holdings had debt of CN¥13.7m, up from none in one year. But on the other hand it also has CN¥69.9m in cash, leading to a CN¥56.2m net cash position.

How Strong Is China Oral Industry Group Holdings' Balance Sheet?

According to the last reported balance sheet, China Oral Industry Group Holdings had liabilities of CN¥52.2m due within 12 months, and liabilities of CN¥11.9m due beyond 12 months. On the other hand, it had cash of CN¥69.9m and CN¥23.8m worth of receivables due within a year. So it can boast CN¥29.7m more liquid assets than total liabilities.

It's good to see that China Oral Industry Group Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that China Oral Industry Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Oral Industry Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Oral Industry Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 41%, to CN¥151m. That makes us nervous, to say the least.

So How Risky Is China Oral Industry Group Holdings?

Although China Oral Industry Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥26m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for China Oral Industry Group Holdings you should be aware of, and 1 of them is significant.

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.