Health Check: How Prudently Does Olympique Lyonnais Groupe (EPA:OLG) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Olympique Lyonnais Groupe SA (EPA:OLG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is Olympique Lyonnais Groupe's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Olympique Lyonnais Groupe had €390.8m of debt in June 2022, down from €409.0m, one year before. However, it also had €27.5m in cash, and so its net debt is €363.3m.

How Strong Is Olympique Lyonnais Groupe's Balance Sheet?

We can see from the most recent balance sheet that Olympique Lyonnais Groupe had liabilities of €179.7m falling due within a year, and liabilities of €393.9m due beyond that. On the other hand, it had cash of €27.5m and €71.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €474.5m.

This deficit casts a shadow over the €132.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Olympique Lyonnais Groupe would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Olympique Lyonnais Groupe'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.

In the last year Olympique Lyonnais Groupe wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to €160m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Olympique Lyonnais Groupe managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable €95m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized €28m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Olympique Lyonnais Groupe (of which 1 can't be ignored!) you should know about.

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.