Is OneConnect Financial Technology (NYSE:OCFT) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 our latest analysis for OneConnect Financial Technology

What Is OneConnect Financial Technology's Net Debt?

The image below, which you can click on for greater detail, shows that OneConnect Financial Technology had debt of CN¥1.02b at the end of June 2021, a reduction from CN¥2.44b over a year. However, it does have CN¥3.38b in cash offsetting this, leading to net cash of CN¥2.35b.

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¥4.03b falling due within a year, and liabilities of CN¥321.8m due beyond that. Offsetting these obligations, it had cash of CN¥3.38b as well as receivables valued at CN¥1.53b due within 12 months. So it can boast CN¥552.5m more liquid assets than total liabilities.

This short term liquidity is a sign that OneConnect Financial Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 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 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¥3.7b, which is a gain of 38%, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year OneConnect Financial Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥1.1b and booked a CN¥1.3b accounting loss. But at least it has CN¥2.35b 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. 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 3 warning signs for OneConnect Financial Technology you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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