Organization of Football Prognostics (ATH:OPAP) Seems To Use Debt Rather Sparingly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Organization of Football Prognostics S.A. (ATH:OPAP) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Organization of Football Prognostics

What Is Organization of Football Prognostics's Debt?

You can click the graphic below for the historical numbers, but it shows that Organization of Football Prognostics had €690.4m of debt in March 2023, down from €839.9m, one year before. But it also has €767.1m in cash to offset that, meaning it has €76.6m net cash.

A Look At Organization of Football Prognostics' Liabilities

According to the last reported balance sheet, Organization of Football Prognostics had liabilities of €552.9m due within 12 months, and liabilities of €827.6m due beyond 12 months. On the other hand, it had cash of €767.1m and €79.0m worth of receivables due within a year. So its liabilities total €534.4m more than the combination of its cash and short-term receivables.

Given Organization of Football Prognostics has a market capitalization of €5.99b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

And we also note warmly that Organization of Football Prognostics grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Organization of Football Prognostics'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Organization of Football Prognostics's liabilities, but we can be reassured by the fact it has has net cash of €76.6m. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in €628m. So is Organization of Football Prognostics's debt a risk? It doesn't seem so to us. 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 4 warning signs for Organization of Football Prognostics (of which 1 is a bit unpleasant!) you should know about.

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.