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. As with many other companies OT Logistics S.A. (WSE:OTS) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. 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.
Check out our latest analysis for OT Logistics
What Is OT Logistics’s Net Debt?
As you can see below, OT Logistics had zł331.8m of debt at June 2020, down from zł359.8m a year prior. However, because it has a cash reserve of zł46.2m, its net debt is less, at about zł285.6m.
A Look At OT Logistics’s Liabilities
Zooming in on the latest balance sheet data, we can see that OT Logistics had liabilities of zł742.1m due within 12 months and liabilities of zł865.7m due beyond that. Offsetting this, it had zł46.2m in cash and zł135.6m in receivables that were due within 12 months. So its liabilities total zł1.43b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the zł64.8m 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, OT Logistics would probably need a major re-capitalization if its creditors were to demand repayment. 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 OT Logistics 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.
Over 12 months, OT Logistics made a loss at the EBIT level, and saw its revenue drop to zł900m, which is a fall of 11%. We would much prefer see growth.
Caveat Emptor
Not only did OT Logistics’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable zł50m at the EBIT level. Reflecting on this and the significant total liabilities, it’s hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we’re sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost zł138m in the last year. So we’re not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We’ve identified 3 warning signs with OT Logistics (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. 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.
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