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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Technical Olympic S.A. (ATH:OLYMP) does use debt in its business. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Technical Olympic Carry?
As you can see below, Technical Olympic had €27.3m of debt at December 2018, down from €33.0m a year prior. However, it does have €1.18m in cash offsetting this, leading to net debt of about €26.1m.
A Look At Technical Olympic's Liabilities
We can see from the most recent balance sheet that Technical Olympic had liabilities of €72.8m falling due within a year, and liabilities of €119.7m due beyond that. Offsetting this, it had €1.18m in cash and €31.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €159.7m.
The deficiency here weighs heavily on the €97.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Technical Olympic would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Technical Olympic'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, Technical Olympic reported revenue of €23m, which is a gain of 2.4%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Technical Olympic produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €8.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €438k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Technical Olympic's profit, revenue, and operating cashflow have changed over the last few years.
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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