Is Omaxe (NSE:OMAXE) Using Too Much 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. Importantly, Omaxe Limited (NSE:OMAXE) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Omaxe

What Is Omaxe's Net Debt?

The chart below, which you can click on for greater detail, shows that Omaxe had ₹9.97b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₹4.21b, its net debt is less, at about ₹5.76b.

How Healthy Is Omaxe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Omaxe had liabilities of ₹78.3b due within 12 months and liabilities of ₹12.3b due beyond that. Offsetting these obligations, it had cash of ₹4.21b as well as receivables valued at ₹4.00b due within 12 months. So its liabilities total ₹82.3b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹14.8b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Omaxe made a loss at the EBIT level, and saw its revenue drop to ₹7.2b, which is a fall of 37%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Omaxe's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹145m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹2.6b in the last year. So while it's not wise to assume the company will fail, we do think it's 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Omaxe (of which 1 is potentially serious!) 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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