Is Orvana Minerals (TSE:ORV) Using Debt In A Risky Way?

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 Orvana Minerals Corp. (TSE:ORV) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Orvana Minerals

What Is Orvana Minerals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Orvana Minerals had US$19.2m of debt, an increase on US$18.0m, over one year. However, it does have US$13.4m in cash offsetting this, leading to net debt of about US$5.85m.

How Strong Is Orvana Minerals' Balance Sheet?

According to the last reported balance sheet, Orvana Minerals had liabilities of US$48.6m due within 12 months, and liabilities of US$31.7m due beyond 12 months. On the other hand, it had cash of US$13.4m and US$3.16m worth of receivables due within a year. So its liabilities total US$63.7m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$50.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Orvana Minerals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Orvana Minerals made a loss at the EBIT level, and saw its revenue drop to US$99m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Orvana Minerals's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$1.4m. 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. But on the bright side the company actually produced a statutory profit of US$5.0m and free cash flow of US$6.7m. So there is definitely a chance that it can improve things in the next few years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Orvana Minerals is showing 2 warning signs in our investment analysis , you should know about...

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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