Ora Banda Mining (ASX:OBM) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Ora Banda Mining Limited (ASX:OBM) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ora Banda Mining

What Is Ora Banda Mining's Net Debt?

The image below, which you can click on for greater detail, shows that Ora Banda Mining had debt of AU$3.99m at the end of June 2024, a reduction from AU$10.9m over a year. But on the other hand it also has AU$26.8m in cash, leading to a AU$22.8m net cash position.

How Strong Is Ora Banda Mining's Balance Sheet?

The latest balance sheet data shows that Ora Banda Mining had liabilities of AU$67.1m due within a year, and liabilities of AU$31.9m falling due after that. On the other hand, it had cash of AU$26.8m and AU$2.83m worth of receivables due within a year. So its liabilities total AU$69.4m more than the combination of its cash and short-term receivables.

Of course, Ora Banda Mining has a market capitalization of AU$1.21b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Ora Banda Mining also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Ora Banda Mining made a loss at the EBIT level, last year, it was also good to see that it generated AU$22m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ora Banda Mining'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ora Banda Mining 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. Over the last year, Ora Banda Mining saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Ora Banda Mining has AU$22.8m in net cash. So we don't have any problem with Ora Banda Mining's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Ora Banda Mining (including 1 which is significant) .

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.