Is Only World Group Holdings Berhad (KLSE:OWG) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Only World Group Holdings Berhad (KLSE:OWG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Only World Group Holdings Berhad

What Is Only World Group Holdings Berhad's Net Debt?

As you can see below, Only World Group Holdings Berhad had RM82.6m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM13.6m in cash, and so its net debt is RM69.0m.

How Strong Is Only World Group Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that Only World Group Holdings Berhad had liabilities of RM86.0m due within a year, and liabilities of RM113.4m falling due after that. Offsetting this, it had RM13.6m in cash and RM16.0m in receivables that were due within 12 months. So its liabilities total RM169.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM185.6m, so it does suggest shareholders should keep an eye on Only World Group Holdings Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Only World Group Holdings Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Only World Group Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 81%, to RM22m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Only World Group Holdings 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 RM39m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM12m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Only World Group Holdings Berhad has 2 warning signs we think you should be aware of.

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.
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