Is OneSmart International Education Group (NYSE:ONE) Weighed On By Its Debt Load?

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. As with many other companies OneSmart International Education Group Limited (NYSE:ONE) makes use of debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for OneSmart International Education Group

How Much Debt Does OneSmart International Education Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2020 OneSmart International Education Group had CN¥2.16b of debt, an increase on CN¥1.63b, over one year. On the flip side, it has CN¥1.27b in cash leading to net debt of about CN¥893.4m.

How Strong Is OneSmart International Education Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OneSmart International Education Group had liabilities of CN¥5.27b due within 12 months and liabilities of CN¥2.10b due beyond that. Offsetting this, it had CN¥1.27b in cash and CN¥9.95m in receivables that were due within 12 months. So it has liabilities totalling CN¥6.09b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥3.89b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, OneSmart International Education Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine OneSmart International Education Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, OneSmart International Education Group made a loss at the EBIT level, and saw its revenue drop to CN¥3.3b, which is a fall of 20%. That's not what we would hope to see.

Caveat Emptor

While OneSmart International Education Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥411m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥799m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with OneSmart International Education Group .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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