Health Check: How Prudently Does Ourgame International Holdings (HKG:6899) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Ourgame International Holdings Limited (HKG:6899) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ourgame International Holdings

What Is Ourgame International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ourgame International Holdings had CN¥28.5m of debt in June 2021, down from CN¥99.2m, one year before. But it also has CN¥141.0m in cash to offset that, meaning it has CN¥112.5m net cash.

How Strong Is Ourgame International Holdings' Balance Sheet?

The latest balance sheet data shows that Ourgame International Holdings had liabilities of CN¥255.5m due within a year, and liabilities of CN¥41.3m falling due after that. Offsetting this, it had CN¥141.0m in cash and CN¥9.64m in receivables that were due within 12 months. So it has liabilities totalling CN¥146.1m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ourgame International Holdings has a market capitalization of CN¥397.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Ourgame International Holdings also has more cash than debt, so we're pretty confident 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 Ourgame International 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 Ourgame International Holdings had a loss before interest and tax, and actually shrunk its revenue by 57%, to CN¥108m. To be frank that doesn't bode well.

So How Risky Is Ourgame International Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Ourgame International Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥71m and booked a CN¥145m accounting loss. Given it only has net cash of CN¥112.5m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Ourgame International Holdings (1 is a bit unpleasant) 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.
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