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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Olympic Circuit Technology Co., Ltd (SHSE:603920) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Olympic Circuit Technology

What Is Olympic Circuit Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Olympic Circuit Technology had CN¥1.21b in debt in June 2024; about the same as the year before. But it also has CN¥3.78b in cash to offset that, meaning it has CN¥2.56b net cash.

A Look At Olympic Circuit Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Olympic Circuit Technology had liabilities of CN¥1.70b due within 12 months and liabilities of CN¥1.17b due beyond that. On the other hand, it had cash of CN¥3.78b and CN¥1.47b worth of receivables due within a year. So it can boast CN¥2.38b more liquid assets than total liabilities.

This surplus suggests that Olympic Circuit Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Olympic Circuit Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Olympic Circuit Technology has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Olympic Circuit Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Olympic Circuit Technology recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Olympic Circuit Technology has CN¥2.56b in net cash and a decent-looking balance sheet. And we liked the look of last year's 37% year-on-year EBIT growth. The bottom line is that we do not find Olympic Circuit Technology's debt levels at all concerning. 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. We've identified 3 warning signs with Olympic Circuit Technology , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.