Stock Analysis

Is Orient Precision Industries (KOSDAQ:065500) A Risky Investment?

KOSDAQ:A065500
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Orient Precision Industries Inc (KOSDAQ:065500) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Orient Precision Industries

What Is Orient Precision Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Orient Precision Industries had ₩40.3b of debt, an increase on ₩36.7b, over one year. However, it also had ₩7.13b in cash, and so its net debt is ₩33.2b.

debt-equity-history-analysis
KOSDAQ:A065500 Debt to Equity History April 6th 2021

A Look At Orient Precision Industries' Liabilities

The latest balance sheet data shows that Orient Precision Industries had liabilities of ₩51.5b due within a year, and liabilities of ₩19.4b falling due after that. On the other hand, it had cash of ₩7.13b and ₩15.6b worth of receivables due within a year. So its liabilities total ₩48.2b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Orient Precision Industries has a market capitalization of ₩132.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Orient Precision Industries 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 Orient Precision Industries had a loss before interest and tax, and actually shrunk its revenue by 6.2%, to ₩82b. We would much prefer see growth.

Caveat Emptor

Importantly, Orient Precision Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩8.5b at the EBIT level. 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. Another cause for caution is that is bled ₩3.3b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Orient Precision Industries (1 is a bit concerning!) that you should be aware of before investing here.

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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