Health Check: How Prudently Does Oriental Payment Group Holdings (HKG:8613) Use Debt?

Warren Buffett famously said, '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 can see that Oriental Payment Group Holdings Limited (HKG:8613) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Oriental Payment Group Holdings

What Is Oriental Payment Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Oriental Payment Group Holdings had HK$17.5m of debt, an increase on HK$6.55m, over one year. But on the other hand it also has HK$34.2m in cash, leading to a HK$16.7m net cash position.

A Look At Oriental Payment Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Oriental Payment Group Holdings had liabilities of HK$8.66m due within 12 months and liabilities of HK$18.7m due beyond that. On the other hand, it had cash of HK$34.2m and HK$30.4m worth of receivables due within a year. So it actually has HK$37.2m more liquid assets than total liabilities.

This luscious liquidity implies that Oriental Payment Group Holdings's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Oriental Payment Group 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 it is Oriental Payment Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Oriental Payment Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$46m, which is a fall of 52%. To be frank that doesn't bode well.

So How Risky Is Oriental Payment Group Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Oriental Payment Group Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$25m of cash and made a loss of HK$17m. With only HK$16.7m 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. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Oriental Payment Group Holdings (at least 2 which are concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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