Does Optima Automobile Group Holdings (HKG:8418) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Optima Automobile Group Holdings Limited (HKG:8418) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Optima Automobile Group Holdings

What Is Optima Automobile Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Optima Automobile Group Holdings had debt of S$10.8m at the end of December 2022, a reduction from S$12.3m over a year. However, because it has a cash reserve of S$6.25m, its net debt is less, at about S$4.51m.

How Strong Is Optima Automobile Group Holdings' Balance Sheet?

The latest balance sheet data shows that Optima Automobile Group Holdings had liabilities of S$9.34m due within a year, and liabilities of S$7.92m falling due after that. On the other hand, it had cash of S$6.25m and S$2.06m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$8.96m.

Of course, Optima Automobile Group Holdings has a market capitalization of S$144.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Optima Automobile Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Optima Automobile Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to S$85m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Optima Automobile Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at S$1.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of S$1.2m. So to be blunt we do think it 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 - Optima Automobile Group Holdings 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.