Is Omni-Lite Industries Canada (CVE:OML) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Omni-Lite Industries Canada Inc. (CVE:OML) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Omni-Lite Industries Canada

How Much Debt Does Omni-Lite Industries Canada Carry?

The chart below, which you can click on for greater detail, shows that Omni-Lite Industries Canada had US$1.52m in debt in March 2021; about the same as the year before. However, it does have US$1.76m in cash offsetting this, leading to net cash of US$241.0k.

A Look At Omni-Lite Industries Canada's Liabilities

Zooming in on the latest balance sheet data, we can see that Omni-Lite Industries Canada had liabilities of US$525.4k due within 12 months and liabilities of US$2.31m due beyond that. Offsetting these obligations, it had cash of US$1.76m as well as receivables valued at US$856.9k due within 12 months. So it has liabilities totalling US$218.4k more than its cash and near-term receivables, combined.

Given Omni-Lite Industries Canada has a market capitalization of US$6.77m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Omni-Lite Industries Canada also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Omni-Lite Industries Canada'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, Omni-Lite Industries Canada made a loss at the EBIT level, and saw its revenue drop to US$5.8m, which is a fall of 36%. That makes us nervous, to say the least.

So How Risky Is Omni-Lite Industries Canada?

While Omni-Lite Industries Canada lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$198k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Omni-Lite Industries Canada (of which 2 don't sit too well with us!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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