Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Prosper One International Holdings Company Limited (HKG:1470) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Prosper One International Holdings
What is the net debt of Prosper One International Holdings?
The image below, which you can click on for more details, shows that in April 2022, Prosper One International Holdings had HK$39.7 million in debt, compared to HK$37.3 million in one. year. But he also has HK$86.1 million in cash to offset that, meaning he has a net cash of HK$46.5 million.
How healthy is Prosper One International Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Prosper One International Holdings had liabilities of HK$142.1 million due within 12 months and liabilities of HK$209.0k due beyond. In return, he had HK$86.1 million in cash and HK$72.0 million in debt due within 12 months. It can therefore boast that it has HK$15.8 million more in cash than total Passives.
This surplus suggests that Prosper One International Holdings is using debt in a way that seems both safe and conservative. Due to her strong net asset position, she is unlikely to run into problems with her lenders. In short, Prosper One International Holdings has clean cash, so it’s fair to say that it doesn’t have heavy debt! There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Prosper One International Holdings will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over the past year, Prosper One International Holdings posted a loss before interest and tax and actually reduced its revenue by 9.7% to HK$75 million. We would much rather see growth.
So how risky is Prosper One International Holdings?
Statistically speaking, businesses that lose money are riskier than those that make money. And over the past year, Prosper One International Holdings has posted a loss in earnings before interest and taxes (EBIT), if truth be told. Indeed, during this period, it burned HK$8.7 million and incurred a loss of HK$6.4 million. With just HK$46.5 million on the balance sheet, it looks like it will soon have to raise capital again. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 2 warning signs for Prosper One International Holdings you should be aware, and one of them is a bit of a concern.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.