Is Orvana Minerals (TSE:ORV) Using Debt Sensibly?

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 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Orvana Minerals

What Is Orvana Minerals's Debt?

As you can see below, Orvana Minerals had US$19.2m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$15.6m in cash offsetting this, leading to net debt of about US$3.59m.

A Look At Orvana Minerals's Liabilities

We can see from the most recent balance sheet that Orvana Minerals had liabilities of US$48.1m falling due within a year, and liabilities of US$31.9m due beyond that. Offsetting these obligations, it had cash of US$15.6m as well as receivables valued at US$2.98m due within 12 months. So its liabilities total US$61.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$27.6m 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, Orvana Minerals would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Orvana Minerals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Orvana Minerals made a loss at the EBIT level, and saw its revenue drop to US$102m, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Orvana Minerals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$8.9m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$1.6m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 be aware of the 1 warning sign we've spotted with Orvana Minerals .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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