Is Optima Automobile Group Holdings (HKG:8418) 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.' 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. As with many other companies Optima Automobile Group Holdings Limited (HKG:8418) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Optima Automobile Group Holdings

How Much Debt Does Optima Automobile Group Holdings Carry?

As you can see below, at the end of December 2021, Optima Automobile Group Holdings had S$12.3m of debt, up from S$8.05m a year ago. Click the image for more detail. On the flip side, it has S$8.27m in cash leading to net debt of about S$4.06m.

How Healthy Is Optima Automobile Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Optima Automobile Group Holdings had liabilities of S$10.8m due within 12 months and liabilities of S$6.33m due beyond that. Offsetting these obligations, it had cash of S$8.27m as well as receivables valued at S$1.42m due within 12 months. So its liabilities total S$7.46m more than the combination of its cash and short-term receivables.

Since publicly traded Optima Automobile Group Holdings shares are worth a total of S$117.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Optima Automobile Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Optima Automobile Group Holdings reported revenue of S$70m, which is a gain of 176%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

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$1.3m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$868k. So we do think this stock is quite risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Optima Automobile Group Holdings (including 1 which shouldn't be ignored) .

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.