Is OKP Holdings (SGX:5CF) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, OKP Holdings Limited (SGX:5CF) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the SG Construction industry.

What Is OKP Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 OKP Holdings had debt of S$47.5m, up from S$38.0m in one year. However, it also had S$41.4m in cash, and so its net debt is S$6.07m.

How Healthy Is OKP Holdings' Balance Sheet?

The latest balance sheet data shows that OKP Holdings had liabilities of S$38.1m due within a year, and liabilities of S$39.9m falling due after that. Offsetting these obligations, it had cash of S$41.4m as well as receivables valued at S$25.6m due within 12 months. So it has liabilities totalling S$10.9m more than its cash and near-term receivables, combined.

OKP Holdings has a market capitalization of S$46.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since OKP Holdings 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 OKP Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to S$99m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, OKP Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost S$1.3m at the EBIT level. 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 S$10.0m of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 6 warning signs for OKP Holdings (of which 3 are potentially serious!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.