Is Orbit Garant Drilling (TSE:OGD) Using Debt Sensibly?

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.' 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. As with many other companies Orbit Garant Drilling Inc. (TSE:OGD) makes use of debt. But is this debt a concern to shareholders?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Orbit Garant Drilling

What Is Orbit Garant Drilling's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Orbit Garant Drilling had CA$38.2m of debt, an increase on CA$35.3m, over one year. However, because it has a cash reserve of CA$1.02m, its net debt is less, at about CA$37.2m.

How Strong Is Orbit Garant Drilling's Balance Sheet?

The latest balance sheet data shows that Orbit Garant Drilling had liabilities of CA$37.8m due within a year, and liabilities of CA$36.8m falling due after that. Offsetting this, it had CA$1.02m in cash and CA$40.1m in receivables that were due within 12 months. So it has liabilities totalling CA$33.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$17.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Orbit Garant Drilling would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Orbit Garant Drilling 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.

In the last year Orbit Garant Drilling wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to CA$195m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Orbit Garant Drilling produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$697k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$6.1m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Orbit Garant Drilling (including 2 which don't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.