Is Olympique Lyonnais Groupe (EPA:OLG) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Olympique Lyonnais Groupe SA (EPA:OLG) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Olympique Lyonnais Groupe

How Much Debt Does Olympique Lyonnais Groupe Carry?

The image below, which you can click on for greater detail, shows that Olympique Lyonnais Groupe had debt of €365.3m at the end of December 2021, a reduction from €429.5m over a year. However, because it has a cash reserve of €37.7m, its net debt is less, at about €327.6m.

A Look At Olympique Lyonnais Groupe's Liabilities

The latest balance sheet data shows that Olympique Lyonnais Groupe had liabilities of €143.1m due within a year, and liabilities of €352.5m falling due after that. Offsetting this, it had €37.7m in cash and €44.1m in receivables that were due within 12 months. So its liabilities total €413.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €165.3m 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's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Olympique Lyonnais Groupe produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €100m. 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. Nevertheless, we would not bet on it given that it vaporized €48m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Olympique Lyonnais Groupe you should know about.

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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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.