Origin Energy (ASX:ORG) Has Debt But No Earnings; Should You Worry?

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 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. As with many other companies Origin Energy Limited (ASX:ORG) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Our analysis indicates that ORG is potentially undervalued!

What Is Origin Energy's Net Debt?

The image below, which you can click on for greater detail, shows that Origin Energy had debt of AU$2.96b at the end of June 2022, a reduction from AU$4.94b over a year. However, it also had AU$1.23b in cash, and so its net debt is AU$1.73b.

A Look At Origin Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Origin Energy had liabilities of AU$6.93b due within 12 months and liabilities of AU$7.07b due beyond that. Offsetting these obligations, it had cash of AU$1.23b as well as receivables valued at AU$3.42b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$9.35b.

This deficit is considerable relative to its market capitalization of AU$9.98b, so it does suggest shareholders should keep an eye on Origin Energy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Origin Energy'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 Origin Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to AU$15b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Origin Energy had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$549m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of AU$1.4b. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Origin Energy has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.