The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. We note that Oriental Press Group Limited (HKG:18) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Oriental Press Group
What Is Oriental Press Group's Debt?
As you can see below, Oriental Press Group had HK$6.69m of debt at March 2019, down from HK$7.41m a year prior. But it also has HK$529.6m in cash to offset that, meaning it has HK$523.0m net cash.
How Healthy Is Oriental Press Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Oriental Press Group had liabilities of HK$85.8m due within 12 months and liabilities of HK$71.0m due beyond that. On the other hand, it had cash of HK$529.6m and HK$313.2m worth of receivables due within a year. So it actually has HK$686.0m more liquid assets than total liabilities.
This surplus strongly suggests that Oriental Press Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Oriental Press Group has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Oriental Press Group if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Oriental Press Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.