Is Prosper One International Holdings (HKG:1470) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Prosper One International Holdings Company Limited (HKG:1470) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Prosper One International Holdings

What Is Prosper One International Holdings's Debt?

As you can see below, at the end of October 2023, Prosper One International Holdings had HK$45.6m of debt, up from HK$40.7m a year ago. Click the image for more detail. But it also has HK$170.0m in cash to offset that, meaning it has HK$124.4m net cash.

How Strong Is Prosper One International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Prosper One International Holdings had liabilities of HK$284.2m falling due within a year, and liabilities of HK$938.0k due beyond that. Offsetting these obligations, it had cash of HK$170.0m as well as receivables valued at HK$617.0k due within 12 months. So its liabilities total HK$114.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$29.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Prosper One International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Prosper One International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Prosper One International 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 Prosper One International Holdings had a loss before interest and tax, and actually shrunk its revenue by 40%, to HK$37m. That makes us nervous, to say the least.

So How Risky Is Prosper One International Holdings?

Although Prosper One International Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$35m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. Be aware that Prosper One International Holdings is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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

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.