Optima Automobile Group Holdings (HKG:8418) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Optima Automobile Group Holdings Limited (HKG:8418) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Optima Automobile Group Holdings

What Is Optima Automobile Group Holdings's Net Debt?

As you can see below, Optima Automobile Group Holdings had S$6.04m of debt at June 2023, down from S$6.89m a year prior. However, because it has a cash reserve of S$2.49m, its net debt is less, at about S$3.55m.

How Healthy Is Optima Automobile Group Holdings' Balance Sheet?

According to the last reported balance sheet, Optima Automobile Group Holdings had liabilities of S$13.3m due within 12 months, and liabilities of S$7.57m due beyond 12 months. On the other hand, it had cash of S$2.49m and S$8.74m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$9.62m.

Of course, Optima Automobile Group Holdings has a market capitalization of S$107.1m, 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 11%, to S$94m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Optima Automobile Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost S$1.3m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$424k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Optima Automobile Group Holdings you should be aware of, and 1 of them is a bit concerning.

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.