Is Olympique Lyonnais Groupe (EPA:OLG) Using Debt Sensibly?

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 note that Olympique Lyonnais Groupe SA (EPA:OLG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Olympique Lyonnais Groupe

What Is Olympique Lyonnais Groupe's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Olympique Lyonnais Groupe had €429.5m of debt, an increase on €310.8m, over one year. However, it does have €105.7m in cash offsetting this, leading to net debt of about €323.8m.

How Strong Is Olympique Lyonnais Groupe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Olympique Lyonnais Groupe had liabilities of €212.4m due within 12 months and liabilities of €372.1m due beyond that. On the other hand, it had cash of €105.7m and €66.5m worth of receivables due within a year. So its liabilities total €412.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €132.7m 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 ultimately the future profitability of the business will decide if Olympique Lyonnais Groupe 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.

In the last year Olympique Lyonnais Groupe had a loss before interest and tax, and actually shrunk its revenue by 32%, to €123m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Olympique Lyonnais Groupe's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €162m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through €3.5m in the last year. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Olympique Lyonnais Groupe , and understanding them should be part of your investment process.

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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