Does OneForce Holdings (HKG:1933) Have A Healthy Balance Sheet?

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. We note that OneForce Holdings Limited (HKG:1933) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 OneForce Holdings

How Much Debt Does OneForce Holdings Carry?

As you can see below, at the end of September 2024, OneForce Holdings had CN¥154.4m of debt, up from CN¥110.4m a year ago. Click the image for more detail. On the flip side, it has CN¥47.3m in cash leading to net debt of about CN¥107.2m.

A Look At OneForce Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that OneForce Holdings had liabilities of CN¥348.7m due within 12 months and liabilities of CN¥16.9m due beyond that. Offsetting this, it had CN¥47.3m in cash and CN¥481.9m in receivables that were due within 12 months. So it can boast CN¥163.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that OneForce Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since OneForce Holdings will need earnings to service that debt. 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 OneForce Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥421m. That's not what we would hope to see.

Caveat Emptor

Not only did OneForce Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥5.3m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. For example - OneForce Holdings has 2 warning signs we think you should be aware of.

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.