We Think Only World Group Holdings Berhad (KLSE:OWG) Has A Fair Chunk Of Debt

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. As with many other companies Only World Group Holdings Berhad (KLSE:OWG) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Only World Group Holdings Berhad

What Is Only World Group Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Only World Group Holdings Berhad had debt of RM77.1m at the end of March 2022, a reduction from RM82.6m over a year. However, it also had RM9.54m in cash, and so its net debt is RM67.6m.

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 RM42.2m due within a year, and liabilities of RM139.1m falling due after that. Offsetting this, it had RM9.54m in cash and RM13.6m in receivables that were due within 12 months. So it has liabilities totalling RM158.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM229.5m, 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. 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.

In the last year Only World Group Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 91%, to RM42m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Only World Group Holdings Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost RM16m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM21m into a profit. So to be blunt we do think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Only World Group Holdings Berhad (including 1 which is potentially serious) .

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.