We Think Orient Overseas (International) (HKG:316) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Orient Overseas (International) Limited (HKG:316) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Orient Overseas (International)

How Much Debt Does Orient Overseas (International) Carry?

The image below, which you can click on for greater detail, shows that Orient Overseas (International) had debt of US$250.7m at the end of December 2021, a reduction from US$1.03b over a year. However, its balance sheet shows it holds US$7.27b in cash, so it actually has US$7.02b net cash.

A Look At Orient Overseas (International)'s Liabilities

According to the last reported balance sheet, Orient Overseas (International) had liabilities of US$3.30b due within 12 months, and liabilities of US$2.88b due beyond 12 months. Offsetting this, it had US$7.27b in cash and US$748.5m in receivables that were due within 12 months. So it can boast US$1.84b more liquid assets than total liabilities.

This surplus suggests that Orient Overseas (International) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Orient Overseas (International) has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Orient Overseas (International) grew its EBIT by 685% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Orient Overseas (International) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Orient Overseas (International) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Orient Overseas (International) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Orient Overseas (International) has net cash of US$7.02b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$8.3b, being 122% of its EBIT. So is Orient Overseas (International)'s debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Orient Overseas (International) (including 1 which is potentially serious) .

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.