Is OCI (AMS:OCI) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies OCI N.V. (AMS:OCI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for OCI

What Is OCI's Net Debt?

As you can see below, OCI had US$2.26b of debt at June 2024, down from US$3.85b a year prior. However, it also had US$73.7m in cash, and so its net debt is US$2.19b.

A Look At OCI's Liabilities

Zooming in on the latest balance sheet data, we can see that OCI had liabilities of US$5.04b due within 12 months and liabilities of US$2.05b due beyond that. On the other hand, it had cash of US$73.7m and US$382.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.64b.

This deficit casts a shadow over the US$2.37b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, OCI would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if OCI can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least OCI booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, OCI had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$207m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$29m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. To that end, you should be aware of the 4 warning signs we've spotted with OCI .

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.