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 Olympic Circuit Technology Co., Ltd (SHSE:603920) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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.

What Is Olympic Circuit Technology's Debt?

As you can see below, Olympic Circuit Technology had CN¥1.07b of debt at March 2024, down from CN¥1.13b a year prior. However, its balance sheet shows it holds CN¥3.95b in cash, so it actually has CN¥2.88b net cash.

A Look At Olympic Circuit Technology's Liabilities

The latest balance sheet data shows that Olympic Circuit Technology had liabilities of CN¥1.53b due within a year, and liabilities of CN¥1.23b falling due after that. Offsetting this, it had CN¥3.95b in cash and CN¥1.33b in receivables that were due within 12 months. So it actually has CN¥2.51b more liquid assets than total liabilities.

This surplus suggests that Olympic Circuit Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Olympic Circuit Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Olympic Circuit Technology grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Olympic Circuit Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Olympic Circuit Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Olympic Circuit Technology recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Olympic Circuit Technology has CN¥2.88b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥982m, being 76% of its EBIT. So we don't think Olympic Circuit Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Olympic Circuit Technology is showing 3 warning signs in our investment analysis , you should know about...

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.

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