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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is OneConnect Financial Technology's Debt?
As you can see below, OneConnect Financial Technology had CN¥1.16b of debt at June 2021, down from CN¥2.44b a year prior. However, its balance sheet shows it holds CN¥3.38b in cash, so it actually has CN¥2.22b net cash.
How Healthy Is OneConnect Financial Technology's Balance Sheet?
According to the last reported balance sheet, OneConnect Financial Technology had liabilities of CN¥4.03b due within 12 months, and liabilities of CN¥321.8m due beyond 12 months. 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 surplus suggests that OneConnect Financial Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.
In the last year OneConnect Financial Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to CN¥3.7b. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is OneConnect Financial Technology?
By their very nature companies that are losing money are more risky than those with a long history of profitability. 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¥1.1b and booked a CN¥1.3b accounting loss. However, it has net cash of CN¥2.22b, so it has a bit of time before it will need more capital. OneConnect Financial Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with OneConnect Financial Technology .
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.
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.
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