Health Check: How Prudently Does OneConnect Financial Technology (NYSE:OCFT) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for OneConnect Financial Technology

What Is OneConnect Financial Technology's Net Debt?

As you can see below, OneConnect Financial Technology had CN¥815.3m of debt at December 2021, down from CN¥2.28b a year prior. However, it does have CN¥3.97b in cash offsetting this, leading to net cash of CN¥3.15b.

How Healthy Is OneConnect Financial Technology's Balance Sheet?

We can see from the most recent balance sheet that OneConnect Financial Technology had liabilities of CN¥5.16b falling due within a year, and liabilities of CN¥343.1m due beyond that. Offsetting these obligations, it had cash of CN¥3.97b as well as receivables valued at CN¥1.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥416.7m.

Given OneConnect Financial Technology has a market capitalization of CN¥4.45b, 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. Despite its noteworthy liabilities, OneConnect Financial Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OneConnect Financial Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, OneConnect Financial Technology reported revenue of CN¥4.1b, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is OneConnect Financial Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months OneConnect Financial Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥404m and booked a CN¥1.3b accounting loss. But at least it has CN¥3.15b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, OneConnect Financial Technology may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 2 warning signs we've spotted with OneConnect Financial Technology .

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.

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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.