Is Oriental Payment Group Holdings (HKG:8613) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Oriental Payment Group Holdings Limited (HKG:8613) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Oriental Payment Group Holdings

What Is Oriental Payment Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Oriental Payment Group Holdings had debt of HK$45.9m, up from HK$29.1m in one year. However, because it has a cash reserve of HK$35.6m, its net debt is less, at about HK$10.3m.

How Healthy Is Oriental Payment Group Holdings' Balance Sheet?

The latest balance sheet data shows that Oriental Payment Group Holdings had liabilities of HK$52.1m due within a year, and liabilities of HK$6.32m falling due after that. On the other hand, it had cash of HK$35.6m and HK$14.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$8.46m.

Given Oriental Payment Group Holdings has a market capitalization of HK$153.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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$4.9m, which is a fall of 48%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Oriental Payment Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$35m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$26m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Oriental Payment Group Holdings is showing 6 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.