Is Olympia Industries Berhad (KLSE:OLYMPIA) Weighed On By Its Debt Load?

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.' 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, Olympia Industries Berhad (KLSE:OLYMPIA) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Olympia Industries Berhad

What Is Olympia Industries Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Olympia Industries Berhad had RM152.2m in debt in September 2020; about the same as the year before. On the flip side, it has RM58.8m in cash leading to net debt of about RM93.3m.

How Healthy Is Olympia Industries Berhad's Balance Sheet?

The latest balance sheet data shows that Olympia Industries Berhad had liabilities of RM186.1m due within a year, and liabilities of RM38.4m falling due after that. On the other hand, it had cash of RM58.8m and RM8.05m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM157.6m.

This deficit casts a shadow over the RM102.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Olympia Industries Berhad 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 Olympia Industries Berhad 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, Olympia Industries Berhad made a loss at the EBIT level, and saw its revenue drop to RM96m, which is a fall of 45%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Olympia Industries Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM38m. 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 RM12m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Olympia Industries Berhad has 2 warning signs (and 1 which doesn't sit too well with us) 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. 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.
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