Does Origin Energy (ASX:ORG) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Origin Energy Limited (ASX:ORG) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Origin Energy

How Much Debt Does Origin Energy Carry?

You can click the graphic below for the historical numbers, but it shows that Origin Energy had AU$3.34b of debt in December 2022, down from AU$4.80b, one year before. However, it does have AU$1.37b in cash offsetting this, leading to net debt of about AU$1.97b.

How Healthy Is Origin Energy's Balance Sheet?

According to the last reported balance sheet, Origin Energy had liabilities of AU$5.66b due within 12 months, and liabilities of AU$6.15b due beyond 12 months. Offsetting this, it had AU$1.37b in cash and AU$2.34b in receivables that were due within 12 months. So its liabilities total AU$8.11b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Origin Energy is worth AU$13.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Origin Energy'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.

In the last year Origin Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to AU$17b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Origin Energy still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$666m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$494m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. Be aware that Origin Energy is showing 1 warning sign in our investment analysis , you should know about...

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.