OKP Holdings (SGX:5CF) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that OKP Holdings Limited (SGX:5CF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 OKP Holdings

How Much Debt Does OKP Holdings Carry?

As you can see below, OKP Holdings had S$37.4m of debt at December 2023, down from S$44.1m a year prior. But it also has S$88.8m in cash to offset that, meaning it has S$51.4m net cash.

How Strong Is OKP Holdings' Balance Sheet?

We can see from the most recent balance sheet that OKP Holdings had liabilities of S$55.1m falling due within a year, and liabilities of S$34.9m due beyond that. On the other hand, it had cash of S$88.8m and S$31.8m worth of receivables due within a year. So it actually has S$30.6m more liquid assets than total liabilities.

This surplus suggests that OKP Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, OKP Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Although OKP Holdings made a loss at the EBIT level, last year, it was also good to see that it generated S$6.0m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is OKP Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. OKP Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, OKP Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case OKP Holdings has S$51.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1,163% of that EBIT to free cash flow, bringing in S$70m. So is OKP Holdings's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for OKP Holdings you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.