Stock Analysis

Orient Precision Industries (KOSDAQ:065500) Is Making Moderate Use Of Debt

KOSDAQ:A065500
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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 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 can see that Orient Precision Industries Inc. (KOSDAQ:065500) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 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 Orient Precision Industries had ₩36.5b of debt in September 2020, down from ₩44.8b, one year before. However, because it has a cash reserve of ₩4.17b, its net debt is less, at about ₩32.3b.

debt-equity-history-analysis
KOSDAQ:A065500 Debt to Equity History December 11th 2020

A Look At Orient Precision Industries's Liabilities

According to the last reported balance sheet, Orient Precision Industries had liabilities of ₩50.5b due within 12 months, and liabilities of ₩10.2b due beyond 12 months. Offsetting this, it had ₩4.17b in cash and ₩15.9b in receivables that were due within 12 months. So it has liabilities totalling ₩40.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Orient Precision Industries is worth ₩97.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Over 12 months, Orient Precision Industries made a loss at the EBIT level, and saw its revenue drop to ₩84b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While Orient Precision Industries'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 ₩7.9b. 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. However, it doesn't help that it burned through ₩1.6b of cash over the last year. So to be blunt we think it is risky. 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. Case in point: We've spotted 2 warning signs for Orient Precision Industries you should be aware of, and 1 of them can'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.

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