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. Importantly, Only World Group Holdings Berhad (KLSE:OWG) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Only World Group Holdings Berhad

What Is Only World Group Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Only World Group Holdings Berhad had RM82.4m of debt in September 2021, down from RM89.7m, one year before. However, it also had RM5.67m in cash, and so its net debt is RM76.8m.

A Look At Only World Group Holdings Berhad's Liabilities

The latest balance sheet data shows that Only World Group Holdings Berhad had liabilities of RM52.5m due within a year, and liabilities of RM139.3m falling due after that. Offsetting this, it had RM5.67m in cash and RM15.7m in receivables that were due within 12 months. So it has liabilities totalling RM170.4m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM169.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Only World Group Holdings 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 Only World Group Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 82%, to RM13m. To be frank that doesn't bode well.

Caveat Emptor

While Only World Group Holdings 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. Indeed, it lost a very considerable RM38m at the EBIT level. 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 burned through RM10m in negative free cash flow over the last year. 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, we've discovered 5 warning signs for Only World Group Holdings Berhad (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.