Is Odyssee Technologies (EPA:ALODY) Using Too Much 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 can see that Odyssee Technologies (EPA:ALODY) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Odyssee Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that Odyssee Technologies had debt of €6.36m at the end of December 2024, a reduction from €7.54m over a year. But on the other hand it also has €8.44m in cash, leading to a €2.09m net cash position.

A Look At Odyssee Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Odyssee Technologies had liabilities of €6.91m due within 12 months and liabilities of €5.99m due beyond that. On the other hand, it had cash of €8.44m and €4.69m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Odyssee Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €51.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Odyssee Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Odyssee Technologies

Even more impressive was the fact that Odyssee Technologies grew its EBIT by 103% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Odyssee Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Odyssee Technologies 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. In the last three years, Odyssee Technologies basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Odyssee Technologies has net cash of €2.09m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 103% over the last year. So is Odyssee Technologies's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Odyssee Technologies that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.