We Think Orion Minerals (ASX:ORN) Has A Fair Chunk Of Debt

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 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 Orion Minerals Limited (ASX:ORN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Orion Minerals

How Much Debt Does Orion Minerals Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Orion Minerals had debt of AU$11.6m, up from AU$3.88m in one year. On the flip side, it has AU$11.0m in cash leading to net debt of about AU$656.0k.

How Strong Is Orion Minerals' Balance Sheet?

According to the last reported balance sheet, Orion Minerals had liabilities of AU$4.28m due within 12 months, and liabilities of AU$25.0m due beyond 12 months. On the other hand, it had cash of AU$11.0m and AU$6.05m worth of receivables due within a year. So it has liabilities totalling AU$12.3m more than its cash and near-term receivables, combined.

Given Orion Minerals has a market capitalization of AU$122.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Orion Minerals has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Orion Minerals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that Orion Minerals finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Orion Minerals had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$11m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$18m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 6 warning signs with Orion Minerals (at least 4 which are significant) , and understanding them should be part of your investment process.

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. 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.