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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, Olympia Industries Berhad (KLSE:OLYMPIA) does carry debt. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Olympia Industries Berhad

What Is Olympia Industries Berhad's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Olympia Industries Berhad had debt of RM133.0m, up from RM125.0m in one year. However, it does have RM23.7m in cash offsetting this, leading to net debt of about RM109.3m.

How Healthy Is Olympia Industries Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Olympia Industries Berhad had liabilities of RM85.5m due within 12 months and liabilities of RM131.3m due beyond that. On the other hand, it had cash of RM23.7m and RM5.30m worth of receivables due within a year. So its liabilities total RM187.8m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Olympia Industries Berhad'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 Olympia Industries Berhad had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to RM88m. That's not what we would hope to see.

Caveat Emptor

Importantly, Olympia Industries Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM11m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM14m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Olympia Industries Berhad has 3 warning signs (and 1 which shouldn't be ignored) we think 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com