We Think Orbit Garant Drilling (TSE:OGD) Has A Fair Chunk Of 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.' 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. As with many other companies Orbit Garant Drilling Inc. (TSE:OGD) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Orbit Garant Drilling

How Much Debt Does Orbit Garant Drilling Carry?

As you can see below, at the end of September 2020, Orbit Garant Drilling had CA$34.6m of debt, up from CA$32.7m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$4.26m, its net debt is less, at about CA$30.3m.

A Look At Orbit Garant Drilling's Liabilities

According to the last reported balance sheet, Orbit Garant Drilling had liabilities of CA$24.2m due within 12 months, and liabilities of CA$34.0m due beyond 12 months. Offsetting this, it had CA$4.26m in cash and CA$27.6m in receivables that were due within 12 months. So its liabilities total CA$26.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CA$35.2m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orbit Garant Drilling'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 Orbit Garant Drilling had a loss before interest and tax, and actually shrunk its revenue by 18%, to CA$130m. That's not what we would hope to see.

Caveat Emptor

While Orbit Garant Drilling's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CA$2.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CA$5.0m into a profit. 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. Case in point: We've spotted 1 warning sign for Orbit Garant Drilling you should be aware of.

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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