Is Olympic Circuit Technology (SHSE:603920) Using Too Much 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. Importantly, Olympic Circuit Technology Co., Ltd (SHSE:603920) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Olympic Circuit Technology

What Is Olympic Circuit Technology's Debt?

The image below, which you can click on for greater detail, shows that Olympic Circuit Technology had debt of CN¥1.13b at the end of September 2023, a reduction from CN¥1.19b over a year. However, it does have CN¥1.70b in cash offsetting this, leading to net cash of CN¥565.6m.

How Strong Is Olympic Circuit Technology's Balance Sheet?

We can see from the most recent balance sheet that Olympic Circuit Technology had liabilities of CN¥1.40b falling due within a year, and liabilities of CN¥1.32b due beyond that. Offsetting these obligations, it had cash of CN¥1.70b as well as receivables valued at CN¥1.34b due within 12 months. So it actually has CN¥318.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Olympic Circuit Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Olympic Circuit Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Olympic Circuit Technology grew its EBIT by 67% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Olympic Circuit Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Olympic Circuit Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Olympic Circuit Technology's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Olympic Circuit Technology has CN¥565.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 67% over the last year. So is Olympic Circuit Technology's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Olympic Circuit Technology that you should be aware of.

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.