Prosper One International Holdings (HKG:1470) Has Debt But No Earnings; Should You Worry?

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.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?

The image below, which you can click on for greater detail, shows that at October 2020 Prosper One International Holdings had debt of HK$33.6m, up from HK$17.2m in one year. However, because it has a cash reserve of HK$19.5m, its net debt is less, at about HK$14.1m.

A Look At Prosper One International Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Prosper One International Holdings had liabilities of HK$154.8m due within 12 months and liabilities of HK$2.74m due beyond that. On the other hand, it had cash of HK$19.5m and HK$37.5m worth of receivables due within a year. So it has liabilities totalling HK$100.5m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of HK$74.4m, we think shareholders really should watch Prosper One International Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Prosper One International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$70m, which is a fall of 49%. To be frank that doesn't bode well.

Caveat Emptor

While Prosper One International Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$33m. When we look at that alongside the significant liabilities, we're not particularly confident 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$47m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Prosper One International Holdings has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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. 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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