Here's Why Orcoda (ASX:ODA) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Orcoda Limited (ASX:ODA) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Orcoda

How Much Debt Does Orcoda Carry?

As you can see below, at the end of December 2023, Orcoda had AU$3.88m of debt, up from AU$1.90m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$5.28m in cash, so it actually has AU$1.41m net cash.

How Healthy Is Orcoda's Balance Sheet?

The latest balance sheet data shows that Orcoda had liabilities of AU$4.52m due within a year, and liabilities of AU$2.74m falling due after that. Offsetting these obligations, it had cash of AU$5.28m as well as receivables valued at AU$1.75m due within 12 months. So it has liabilities totalling AU$226.1k more than its cash and near-term receivables, combined.

Having regard to Orcoda's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$28.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Orcoda boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Orcoda made a loss at the EBIT level, last year, it was also good to see that it generated AU$2.0m 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 Orcoda's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Orcoda 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. Happily for any shareholders, Orcoda actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Orcoda has AU$1.41m in net cash. The cherry on top was that in converted 193% of that EBIT to free cash flow, bringing in AU$3.9m. So we don't think Orcoda's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Orcoda you should know about.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com