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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Prosper One International Holdings Company Limited (HKG:1470) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Prosper One International Holdings

What Is Prosper One International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at April 2021 Prosper One International Holdings had debt of HK$37.3m, up from HK$27.4m in one year. However, it does have HK$13.4m in cash offsetting this, leading to net debt of about HK$23.9m.

A Look At Prosper One International Holdings' Liabilities

According to the last reported balance sheet, Prosper One International Holdings had liabilities of HK$155.1m due within 12 months, and liabilities of HK$1.97m due beyond 12 months. Offsetting this, it had HK$13.4m in cash and HK$22.8m in receivables that were due within 12 months. So it has liabilities totalling HK$120.8m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's HK$104.8m 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. 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 Prosper One International 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 Prosper One International Holdings had a loss before interest and tax, and actually shrunk its revenue by 11%, to HK$83m. We would much prefer see growth.

Caveat Emptor

Not only did Prosper One International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$2.5m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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$769k. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Prosper One International Holdings (including 1 which is significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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