Is OneConnect Financial Technology (NYSE:OCFT) 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.' 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. We can see that OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for OneConnect Financial Technology

What Is OneConnect Financial Technology's Debt?

The image below, which you can click on for greater detail, shows that OneConnect Financial Technology had debt of CN¥1.18b at the end of September 2021, a reduction from CN¥2.45b over a year. But on the other hand it also has CN¥3.83b in cash, leading to a CN¥2.65b net cash position.

How Strong Is OneConnect Financial Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OneConnect Financial Technology had liabilities of CN¥5.16b due within 12 months and liabilities of CN¥386.2m due beyond that. On the other hand, it had cash of CN¥3.83b and CN¥1.69b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that OneConnect Financial Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.35b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, OneConnect Financial Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine OneConnect Financial Technology'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, OneConnect Financial Technology reported revenue of CN¥3.9b, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is OneConnect Financial Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that OneConnect Financial Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥433m of cash and made a loss of CN¥1.3b. But at least it has CN¥2.65b 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. We've identified 2 warning signs with OneConnect Financial Technology , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.