Does Orocobre (ASX:ORE) Have A Healthy Balance Sheet?

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 Orocobre Limited (ASX:ORE) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Orocobre

What Is Orocobre's Net Debt?

As you can see below, at the end of December 2020, Orocobre had US$251.0m of debt, up from US$183.6m a year ago. Click the image for more detail. But on the other hand it also has US$262.3m in cash, leading to a US$11.4m net cash position.

A Look At Orocobre's Liabilities

According to the last reported balance sheet, Orocobre had liabilities of US$68.7m due within 12 months, and liabilities of US$414.2m due beyond 12 months. Offsetting this, it had US$262.3m in cash and US$17.8m in receivables that were due within 12 months. So its liabilities total US$202.8m more than the combination of its cash and short-term receivables.

Since publicly traded Orocobre shares are worth a total of US$1.86b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Orocobre boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Orocobre'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.

In the last year Orocobre had a loss before interest and tax, and actually shrunk its revenue by 47%, to US$64m. That makes us nervous, to say the least.

So How Risky Is Orocobre?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Orocobre lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$126m of cash and made a loss of US$56m. With only US$11.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 2 warning signs for Orocobre that you should be aware of.

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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