Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Berhad OCR Group (KLSE:OCR) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for OCR Group Berhad
What is the debt of the OCR Berhad group?
As you can see below, at the end of December 2021, OCR Group Berhad had a debt of RM122.1 million, compared to RM87.3 million a year ago. Click on the image for more details. However, since he has a cash reserve of RM30.9 million, his net debt is less at around RM91.2 million.
How strong is OCR Group Berhad’s balance sheet?
We can see from the most recent balance sheet that OCR Berhad Group had liabilities of RM173.0m due within one year, and liabilities of RM102.8m due beyond. In return, he had RM30.9 million in cash and RM148.7 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (short term) of RM96.2 million.
When you consider that this shortfall exceeds the company’s market cap of RM93.2 million, you might be inclined to take a close look at the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since OCR Group Berhad will need income to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Over 12 months, OCR Group Berhad recorded a loss in EBIT and saw its revenue drop to RM45 million, a decline of 39%. To be honest, that doesn’t bode well.
Not only has OCR Group Berhad’s revenue dropped over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Its EBIT loss was a whopping RM21m. When we look at this alongside significant liabilities, we are not particularly confident in the business. It would have to quickly improve its functioning so that we are interested in it. Not least because it burned RM15m in negative free cash flow in the last year. So suffice it to say that we consider the stock to be risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. We have identified 3 warning signs with OCR Group Berhad (at least 2 that make us uncomfortable), and understanding them should be part of your investment process.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.