We Think Orca Energy Group (CVE:ORC.B) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Orca Energy Group Inc. (CVE:ORC.B) does carry debt. But the more important question is: how much risk is that debt creating?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Orca Energy Group

What Is Orca Energy Group's Net Debt?

The image below, which you can click on for greater detail, shows that Orca Energy Group had debt of US$54.2m at the end of September 2020, a reduction from US$58.8m over a year. However, it does have US$98.5m in cash offsetting this, leading to net cash of US$44.3m.

How Strong Is Orca Energy Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Orca Energy Group had liabilities of US$45.8m due within 12 months and liabilities of US$97.1m due beyond that. Offsetting this, it had US$98.5m in cash and US$21.8m in receivables that were due within 12 months. So it has liabilities totalling US$22.6m more than its cash and near-term receivables, combined.

Given Orca Energy Group has a market capitalization of US$193.7m, 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. Despite its noteworthy liabilities, Orca Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Orca Energy Group grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Orca Energy Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Orca Energy Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Orca Energy Group generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

Although Orca Energy Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$44.3m. And it impressed us with free cash flow of US$20m, being 97% of its EBIT. So is Orca Energy Group's debt a risk? It doesn't seem so to us. 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. Be aware that Orca Energy Group is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.

If you’re looking to trade Orca Energy Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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