Is Olympia Industries Berhad (KLSE:OLYMPIA) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Olympia Industries Berhad (KLSE:OLYMPIA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Olympia Industries Berhad

What Is Olympia Industries Berhad's Debt?

As you can see below, Olympia Industries Berhad had RM150.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has RM58.5m in cash leading to net debt of about RM91.5m.

How Strong Is Olympia Industries Berhad's Balance Sheet?

According to the last reported balance sheet, Olympia Industries Berhad had liabilities of RM66.3m due within 12 months, and liabilities of RM154.0m due beyond 12 months. Offsetting this, it had RM58.5m in cash and RM7.40m in receivables that were due within 12 months. So its liabilities total RM154.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM76.8m 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. At the end of the day, Olympia Industries Berhad would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Olympia Industries Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Olympia Industries Berhad had a loss before interest and tax, and actually shrunk its revenue by 23%, to RM60m. That makes us nervous, to say the least.

Caveat Emptor

While Olympia Industries Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM3.4m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RM8.9m over the last twelve months. So suffice it to say we 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Olympia Industries Berhad (of which 1 is concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.