Here's Why OneForce Holdings (HKG:1933) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies OneForce Holdings Limited (HKG:1933) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for OneForce Holdings

What Is OneForce Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 OneForce Holdings had CN¥31.3m of debt, an increase on CN¥13.0m, over one year. But it also has CN¥40.8m in cash to offset that, meaning it has CN¥9.56m net cash.

A Look At OneForce Holdings' Liabilities

We can see from the most recent balance sheet that OneForce Holdings had liabilities of CN¥148.8m falling due within a year, and liabilities of CN¥1.36m due beyond that. On the other hand, it had cash of CN¥40.8m and CN¥262.2m worth of receivables due within a year. So it actually has CN¥152.8m more liquid assets than total liabilities.

This surplus strongly suggests that OneForce Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, OneForce Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, OneForce Holdings turned things around in the last 12 months, delivering and EBIT of CN¥26m. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While OneForce Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, OneForce Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case OneForce Holdings has CN¥9.56m in net cash and a strong balance sheet. So we don't have any problem with OneForce Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that OneForce Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.
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