Olympia Industries Berhad (KLSE:OLYMPIA) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Olympia Industries Berhad

What Is Olympia Industries Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Olympia Industries Berhad had RM150.0m in debt in September 2021; about the same as the year before. However, because it has a cash reserve of RM57.4m, its net debt is less, at about RM92.6m.

A Look At Olympia Industries Berhad's Liabilities

The latest balance sheet data shows that Olympia Industries Berhad had liabilities of RM65.2m due within a year, and liabilities of RM154.4m falling due after that. Offsetting these obligations, it had cash of RM57.4m as well as receivables valued at RM9.55m due within 12 months. So its liabilities total RM152.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM87.0m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Olympia Industries Berhad made a loss at the EBIT level, and saw its revenue drop to RM58m, which is a fall of 40%. To be frank that doesn't bode well.

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). To be specific the EBIT loss came in at RM4.0m. Considering that alongside the liabilities mentioned above make us nervous 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 RM9.3m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Olympia Industries Berhad (1 makes us a bit uncomfortable) you should be aware of.

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.

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.

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