Technical Olympic (ATH:OLYMP) Could Easily Take On More Debt

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 Technical Olympic S.A. (ATH:OLYMP) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, 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 Technical Olympic

What Is Technical Olympic's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Technical Olympic had €11.0m of debt in December 2022, down from €13.2m, one year before. But it also has €37.2m in cash to offset that, meaning it has €26.3m net cash.

How Strong Is Technical Olympic's Balance Sheet?

We can see from the most recent balance sheet that Technical Olympic had liabilities of €18.3m falling due within a year, and liabilities of €20.3m due beyond that. Offsetting these obligations, it had cash of €37.2m as well as receivables valued at €30.0m due within 12 months. So it actually has €28.7m more liquid assets than total liabilities.

It's good to see that Technical Olympic has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Technical Olympic has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Technical Olympic made a loss at the EBIT level, last year, it was also good to see that it generated €788k in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Technical Olympic will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Technical Olympic 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 last year, Technical Olympic actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Technical Olympic has €26.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €2.7m, being 338% of its EBIT. So we don't think Technical Olympic's use of debt is risky. 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. For example - Technical Olympic has 1 warning sign we think 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.