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

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.' 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?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider 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 chart below, which you can click on for greater detail, shows that Prosper One International Holdings had HK$40.7m in debt in October 2022; about the same as the year before. However, it does have HK$132.3m in cash offsetting this, leading to net cash of HK$91.6m.

A Look At Prosper One International Holdings' Liabilities

According to the last reported balance sheet, Prosper One International Holdings had liabilities of HK$175.7m due within 12 months, and liabilities of HK$35.0k due beyond 12 months. Offsetting this, it had HK$132.3m in cash and HK$1.61m in receivables that were due within 12 months. So its liabilities total HK$41.8m more than the combination of its cash and short-term receivables.

Prosper One International Holdings has a market capitalization of HK$76.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Prosper One International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Prosper One International Holdings turned things around in the last 12 months, delivering and EBIT of HK$2.1m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Prosper One International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Prosper One International Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Prosper One International Holdings does have more liabilities than liquid assets, it also has net cash of HK$91.6m. And it impressed us with free cash flow of HK$118m, being 5,577% of its EBIT. So we are not troubled with Prosper One International Holdings's debt use. 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. For example, we've discovered 3 warning signs for Prosper One International Holdings (1 is a bit unpleasant!) that you should be aware of before investing here.

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.