Ovostar Union (WSE:OVO) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Ovostar Union Public Company Limited (WSE:OVO) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ovostar Union

What Is Ovostar Union's Net Debt?

As you can see below, Ovostar Union had US$7.94m of debt at March 2023, down from US$11.0m a year prior. But on the other hand it also has US$29.3m in cash, leading to a US$21.4m net cash position.

A Look At Ovostar Union's Liabilities

Zooming in on the latest balance sheet data, we can see that Ovostar Union had liabilities of US$12.4m due within 12 months and liabilities of US$5.50m due beyond that. Offsetting this, it had US$29.3m in cash and US$25.4m in receivables that were due within 12 months. So it actually has US$36.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Ovostar Union's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Ovostar Union has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Ovostar Union grew its EBIT by 747% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ovostar Union will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ovostar Union has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Ovostar Union's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ovostar Union has net cash of US$21.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 747% over the last year. So is Ovostar Union's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Ovostar Union (of which 1 is a bit concerning!) you should know about.

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.