Is Organization of Football Prognostics (ATH:OPAP) Using Too Much 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 note that Organization of Football Prognostics S.A. (ATH:OPAP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 Organization of Football Prognostics

What Is Organization of Football Prognostics's Debt?

As you can see below, Organization of Football Prognostics had €665.0m of debt at September 2023, down from €843.2m a year prior. But it also has €812.8m in cash to offset that, meaning it has €147.8m net cash.

A Look At Organization of Football Prognostics' Liabilities

According to the last reported balance sheet, Organization of Football Prognostics had liabilities of €939.5m due within 12 months, and liabilities of €800.2m due beyond 12 months. Offsetting this, it had €812.8m in cash and €95.3m in receivables that were due within 12 months. So its liabilities total €831.6m more than the combination of its cash and short-term receivables.

Given Organization of Football Prognostics has a market capitalization of €5.82b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Organization of Football Prognostics also has more cash than debt, so we're pretty confident it can manage its debt safely.

Organization of Football Prognostics's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Organization of Football Prognostics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Organization of Football Prognostics 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 three years, Organization of Football Prognostics actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Organization of Football Prognostics's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €147.8m. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in €599m. So we don't think Organization of Football Prognostics'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. Case in point: We've spotted 3 warning signs for Organization of Football Prognostics you should be aware of, and 2 of them are significant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.