Omni-Lite Industries Canada (CVE:OML) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Omni-Lite Industries Canada Inc. (CVE:OML) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See 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 Omni-Lite Industries Canada had debt of US$1.92m at the end of September 2021, a reduction from US$2.33m over a year. On the flip side, it has US$1.37m in cash leading to net debt of about US$552.3k.

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

The latest balance sheet data shows that Omni-Lite Industries Canada had liabilities of US$597.8k due within a year, and liabilities of US$2.50m falling due after that. On the other hand, it had cash of US$1.37m and US$1.08m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$648.5k.

Since publicly traded Omni-Lite Industries Canada shares are worth a total of US$8.40m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 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 Omni-Lite Industries Canada had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$5.4m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Omni-Lite Industries Canada's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$1.9m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$235k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Omni-Lite Industries Canada .

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.