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.' 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. We can see that Optima Automobile Group Holdings Limited (HKG:8418) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Optima Automobile Group Holdings
What Is Optima Automobile Group Holdings's Debt?
The image below, which you can click on for greater detail, shows that Optima Automobile Group Holdings had debt of S$5.54m at the end of June 2024, a reduction from S$6.04m over a year. However, it does have S$3.52m in cash offsetting this, leading to net debt of about S$2.02m.
How Healthy Is Optima Automobile Group Holdings' Balance Sheet?
We can see from the most recent balance sheet that Optima Automobile Group Holdings had liabilities of S$11.2m falling due within a year, and liabilities of S$5.02m due beyond that. Offsetting these obligations, it had cash of S$3.52m as well as receivables valued at S$5.95m due within 12 months. So it has liabilities totalling S$6.71m more than its cash and near-term receivables, combined.
Since publicly traded Optima Automobile Group Holdings shares are worth a total of S$83.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Optima Automobile Group Holdings'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.
Over 12 months, Optima Automobile Group Holdings made a loss at the EBIT level, and saw its revenue drop to S$76m, which is a fall of 35%. That makes us nervous, to say the least.
Caveat Emptor
While Optima Automobile Group Holdings'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 S$145k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 S$795k 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. For example, we've discovered 2 warning signs for Optima Automobile Group Holdings that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.