Does Oriental Payment Group Holdings (HKG:8613) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Oriental Payment Group Holdings Limited (HKG:8613) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Oriental Payment Group Holdings

What Is Oriental Payment Group Holdings's Net Debt?

As you can see below, at the end of March 2021, Oriental Payment Group Holdings had HK$18.2m of debt, up from HK$6.05m a year ago. Click the image for more detail. But it also has HK$29.2m in cash to offset that, meaning it has HK$11.1m net cash.

How Healthy Is Oriental Payment Group Holdings' Balance Sheet?

According to the last reported balance sheet, Oriental Payment Group Holdings had liabilities of HK$16.3m due within 12 months, and liabilities of HK$19.0m due beyond 12 months. Offsetting these obligations, it had cash of HK$29.2m as well as receivables valued at HK$37.3m due within 12 months. So it can boast HK$31.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Oriental Payment Group Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Oriental Payment Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Oriental Payment Group 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 Oriental Payment Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 85%, to HK$12m. To be frank that doesn't bode well.

So How Risky Is Oriental Payment Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Oriental Payment Group Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$19m of cash and made a loss of HK$31m. Given it only has net cash of HK$11.1m, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Oriental Payment Group Holdings you should be aware of, and 1 of them is significant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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