Health Check: How Prudently Does Oldfields Holdings (ASX:OLH) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Oldfields Holdings Limited (ASX:OLH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Oldfields Holdings

How Much Debt Does Oldfields Holdings Carry?

As you can see below, Oldfields Holdings had AU$4.42m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of AU$1.43m, its net debt is less, at about AU$2.99m.

How Strong Is Oldfields Holdings' Balance Sheet?

The latest balance sheet data shows that Oldfields Holdings had liabilities of AU$13.8m due within a year, and liabilities of AU$5.20m falling due after that. Offsetting this, it had AU$1.43m in cash and AU$8.10m in receivables that were due within 12 months. So it has liabilities totalling AU$9.52m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$9.99m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Oldfields Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Oldfields Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to AU$38m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Oldfields Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$714k in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Oldfields Holdings is showing 4 warning signs in our investment analysis , and 3 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.