Omni-Lite Industries Canada (CVE:OML) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Omni-Lite Industries Canada Inc. (CVE:OML) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Omni-Lite Industries Canada

How Much Debt Does Omni-Lite Industries Canada Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Omni-Lite Industries Canada had debt of US$2.30m, up from US$700.0k in one year. However, it does have US$1.37m in cash offsetting this, leading to net debt of about US$931.7k.

How Strong Is Omni-Lite Industries Canada's Balance Sheet?

According to the last reported balance sheet, Omni-Lite Industries Canada had liabilities of US$555.1k due within 12 months, and liabilities of US$4.17m due beyond 12 months. Offsetting these obligations, it had cash of US$1.37m as well as receivables valued at US$1.22m due within 12 months. So it has liabilities totalling US$2.14m more than its cash and near-term receivables, combined.

Omni-Lite Industries Canada has a market capitalization of US$8.39m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Omni-Lite Industries Canada will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Omni-Lite Industries Canada had a loss before interest and tax, and actually shrunk its revenue by 18%, to US$7.6m. That's not what we would hope to see.

Caveat Emptor

While Omni-Lite Industries Canada's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$1.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$509k in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 3 warning signs for Omni-Lite Industries Canada (2 are potentially serious) you should be aware of.

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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