Is Orbit Exports (NSE:ORBTEXP) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Orbit Exports Limited (NSE:ORBTEXP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Orbit Exports

How Much Debt Does Orbit Exports Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2020 Orbit Exports had ₹143.0m of debt, an increase on ₹60.8m, over one year. However, it does have ₹350.9m in cash offsetting this, leading to net cash of ₹207.9m.

How Strong Is Orbit Exports's Balance Sheet?

We can see from the most recent balance sheet that Orbit Exports had liabilities of ₹291.4m falling due within a year, and liabilities of ₹242.3m due beyond that. On the other hand, it had cash of ₹350.9m and ₹382.9m worth of receivables due within a year. So it actually has ₹200.1m more liquid assets than total liabilities.

This surplus suggests that Orbit Exports has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Orbit Exports boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Orbit Exports's saving grace is its low debt levels, because its EBIT has tanked 55% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orbit Exports's ability to maintain a healthy balance sheet going forward. 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. While Orbit Exports has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Orbit Exports generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Orbit Exports has net cash of ₹207.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in ₹253m. So we are not troubled with Orbit Exports's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Orbit Exports (including 1 which is is concerning) .

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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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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