Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that “volatility is nowhere near synonymous with risk.” So smart money seems to know that debt – which is usually associated with bankruptcies – is a very important factor in assessing how risky a company is. We can see that OneConnect Financial Technology Co., Ltd. (NYSE: OCFT) uses debt in its business. But should shareholders be concerned about the use of debt?
What is the risk of debt?
Debt and other liabilities become risky for a company when it cannot meet those obligations easily, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still expensive) situation is that a company needs to water down shareholders on a cheap stock price just to get a grip on debt. Of course, debt can be an important tool in any business, especially in capital-intensive companies. When examining debt, we first look at both cash and debt levels together.
Check out our latest analysis for OneConnect Financial Technology
What debts does OneConnect Financial Technology have?
The image below, which you can click for more details, shows that OneConnect Financial Technology had debts of 1.18 billion at the end of September 2021, but on the other hand it also has 3.83 billion CN in cash, resulting in a net Leads cash position of CN 2.65 billion.
NYSE: OCFT Debt-to-Equity History December 1, 2021
How strong is the balance sheet of OneConnect Financial Technology?
If we zoom in on the latest balance sheet data, we can see that OneConnect Financial Technology had CN5.16 billion in debt and CN386.2 million in debt on top of that. On the other hand, it had cash and cash equivalents of CN 3.83 billion and CN 1.69 billion in receivables due within one year. His total liabilities are therefore almost perfectly matched with his short-term, liquid funds.
This shows that OneConnect Financial Technology’s balance sheet looks pretty solid, with total liabilities roughly equal to cash. While it’s hard to imagine the company with $ 6.35 billion in debt, OneConnect Financial Technology also has more cash than debt, so we’re pretty confident it can safely manage its debt. Undoubtedly, we learn most about balance sheet debt. But, more than anything, future profits are what determine OneConnect Financial Technology’s ability to continue to maintain healthy balance sheets. So if you are focused on the future, this is what you can check out here for free Earnings forecast report for analysts.
Over a 12-month period, OneConnect Financial Technology reported sales of CN ¥ 3.9b, an increase of 31% despite the absence of earnings before interest and taxes. With a little luck, the company can grow into profitability.
How Risky is OneConnect Financial Technology?
Statistically speaking, companies that lose money are riskier than those that make money. And we find that OneConnect Financial Technology had earnings before interest and taxes (EBIT) for the last year. In fact, during that time she has burned CN433 million in cash and made a loss of CN1.3 billion. But at least it has 2.65 billion yen on its balance sheet that can be spent on growth in the short term. With very solid sales growth last year, OneConnect Financial Technology could be on the path to profitability. By investing before those profits, shareholders take more risks in the hope of bigger profits. The balance sheet is clearly the area to focus on when analyzing debt. However, not all of the investment risk is on the balance sheet – on the contrary. We have identified 2 warning signs with OneConnect Financial Technology, and understanding it should be part of your investment process.
If you’re one of those investors who’d rather buy debt-free stocks, don’t hesitate to discover our exclusive list of net cash growth stocks today.
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