Is OCR Group Berhad (KLSE:OCR) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that OCR Group Berhad (KLSE:OCR) does use debt in its business. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 OCR Group Berhad

How Much Debt Does OCR Group Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2020 OCR Group Berhad had debt of RM87.3m, up from RM80.0m in one year. However, because it has a cash reserve of RM35.6m, its net debt is less, at about RM51.7m.

A Look At OCR Group Berhad's Liabilities

The latest balance sheet data shows that OCR Group Berhad had liabilities of RM140.6m due within a year, and liabilities of RM73.5m falling due after that. On the other hand, it had cash of RM35.6m and RM161.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM17.3m.

Given OCR Group Berhad has a market capitalization of RM114.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since OCR Group Berhad 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 OCR Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 11%, to RM73m. We would much prefer see growth.

Caveat Emptor

While OCR Group Berhad'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 RM521k. 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 RM17m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for OCR Group Berhad (1 makes us a bit uncomfortable) you should be aware of.

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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