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.' 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. Importantly, Olympique Lyonnais Groupe SA (EPA:OLG) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Olympique Lyonnais Groupe
How Much Debt Does Olympique Lyonnais Groupe Carry?
As you can see below, Olympique Lyonnais Groupe had €270.7m of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of €16.7m, its net debt is less, at about €254.0m.
How Healthy Is Olympique Lyonnais Groupe's Balance Sheet?
We can see from the most recent balance sheet that Olympique Lyonnais Groupe had liabilities of €148.0m falling due within a year, and liabilities of €243.7m due beyond that. On the other hand, it had cash of €16.7m and €96.1m worth of receivables due within a year. So it has liabilities totalling €278.9m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of €191.6m, we think shareholders really should watch Olympique Lyonnais Groupe's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Olympique Lyonnais Groupe's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.