Is Prosper One International Holdings (HKG:1470) Weighed On By Its Debt Load?

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.' 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. Importantly, Prosper One International Holdings Company Limited (HKG:1470) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at April 2022 Prosper One International Holdings had debt of HK$39.7m, up from HK$37.3m in one year. But it also has HK$86.1m in cash to offset that, meaning it has HK$46.5m net cash.

How Healthy Is Prosper One International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prosper One International Holdings had liabilities of HK$142.1m due within 12 months and liabilities of HK$209.0k due beyond that. Offsetting this, it had HK$86.1m in cash and HK$72.0m in receivables that were due within 12 months. So it can boast HK$15.8m more liquid assets than total liabilities.

This surplus suggests that Prosper One International Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Prosper One International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 9.7%, to HK$75m. We would much prefer see growth.

So How Risky Is Prosper One International Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Prosper One International Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$8.7m of cash and made a loss of HK$6.4m. With only HK$46.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 2 warning signs for Prosper One International Holdings you should be aware of, and 1 of them is a bit concerning.

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.

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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.