David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Orient Group Incorporation (SHSE:600811) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Orient Group Incorporation's Debt?

The image below, which you can click on for greater detail, shows that Orient Group Incorporation had debt of CN¥17.3b at the end of June 2024, a reduction from CN¥19.4b over a year. However, because it has a cash reserve of CN¥1.95b, its net debt is less, at about CN¥15.3b.

How Strong Is Orient Group Incorporation's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Orient Group Incorporation had liabilities of CN¥14.8b due within 12 months and liabilities of CN¥4.90b due beyond that. Offsetting these obligations, it had cash of CN¥1.95b as well as receivables valued at CN¥3.08b due within 12 months. So it has liabilities totalling CN¥14.7b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥5.20b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Orient Group Incorporation would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Orient Group Incorporation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Orient Group Incorporation made a loss at the EBIT level, and saw its revenue drop to CN¥3.2b, which is a fall of 62%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Orient Group Incorporation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥208m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥1.3b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Orient Group Incorporation that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.