These 4 Measures Indicate That Only World Group Holdings Berhad (KLSE:OWG) Is Using Debt Extensively

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.' 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 the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Only World Group Holdings Berhad

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

You can click the graphic below for the historical numbers, but it shows that Only World Group Holdings Berhad had RM48.8m of debt in September 2024, down from RM59.3m, one year before. However, it does have RM66.3m in cash offsetting this, leading to net cash of RM17.5m.

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

We can see from the most recent balance sheet that Only World Group Holdings Berhad had liabilities of RM81.8m falling due within a year, and liabilities of RM104.8m due beyond that. Offsetting these obligations, it had cash of RM66.3m as well as receivables valued at RM19.9m due within 12 months. So its liabilities total RM100.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of RM126.2m, so it does suggest shareholders should keep an eye on Only World Group Holdings Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Only World Group Holdings Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Only World Group Holdings Berhad's EBIT fell a jaw-dropping 52% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Only World Group Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Only World Group Holdings Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Only World Group Holdings Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM17.5m. The cherry on top was that in converted 304% of that EBIT to free cash flow, bringing in RM33m. So although we see some areas for improvement, we're not too worried about Only World Group Holdings Berhad's balance sheet. 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. Be aware that Only World Group Holdings Berhad is showing 3 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.