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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that China Oriental Group Company Limited (HKG:581) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for China Oriental Group
What Is China Oriental Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 China Oriental Group had CN¥3.78b of debt, an increase on CN¥1.90b, over one year. However, it does have CN¥11.5b in cash offsetting this, leading to net cash of CN¥7.75b.
A Look At China Oriental Group's Liabilities
The latest balance sheet data shows that China Oriental Group had liabilities of CN¥12.6b due within a year, and liabilities of CN¥1.03b falling due after that. Offsetting this, it had CN¥11.5b in cash and CN¥2.85b in receivables that were due within 12 months. So it actually has CN¥729.9m more liquid assets than total liabilities.
This surplus suggests that China Oriental Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Oriental Group has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact China Oriental Group's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. 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 it is future earnings, more than anything, that will determine China Oriental Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.