Is Omaxe (NSE:OMAXE) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Omaxe Limited (NSE:OMAXE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is Omaxe's Debt?

The chart below, which you can click on for greater detail, shows that Omaxe had ₹11.6b in debt in September 2022; about the same as the year before. However, it does have ₹4.66b in cash offsetting this, leading to net debt of about ₹6.96b.

A Look At Omaxe's Liabilities

The latest balance sheet data shows that Omaxe had liabilities of ₹104.5b due within a year, and liabilities of ₹11.9b falling due after that. On the other hand, it had cash of ₹4.66b and ₹3.84b worth of receivables due within a year. So its liabilities total ₹108.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₹13.4b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Omaxe would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Omaxe will need earnings to service that debt. 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 Omaxe wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to ₹5.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Omaxe had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹1.6b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹2.1b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Omaxe is showing 1 warning sign in our investment analysis , you should know about...

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.