ONEX (TYO:5987) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that ONEX Corporation (TYO:5987) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for ONEX

How Much Debt Does ONEX Carry?

As you can see below, at the end of September 2020, ONEX had JP¥3.38b of debt, up from JP¥3.17b a year ago. Click the image for more detail. However, it also had JP¥3.30b in cash, and so its net debt is JP¥81.0m.

How Healthy Is ONEX's Balance Sheet?

We can see from the most recent balance sheet that ONEX had liabilities of JP¥1.84b falling due within a year, and liabilities of JP¥3.41b due beyond that. Offsetting this, it had JP¥3.30b in cash and JP¥1.26b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥689.0m.

While this might seem like a lot, it is not so bad since ONEX has a market capitalization of JP¥2.31b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ONEX will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ONEX had a loss before interest and tax, and actually shrunk its revenue by 18%, to JP¥5.0b. That's not what we would hope to see.

Caveat Emptor

While ONEX's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at JP¥45m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of JP¥107m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - ONEX has 5 warning signs (and 1 which can't be ignored) we think you should know about.

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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