Does OC Oerlikon (VTX:OERL) Have A Healthy Balance Sheet?

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.' 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. We can see that OC Oerlikon Corporation AG (VTX:OERL) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for OC Oerlikon

What Is OC Oerlikon's Debt?

As you can see below, at the end of December 2020, OC Oerlikon had CHF165.0m of debt, up from CHF155.0m a year ago. Click the image for more detail. But on the other hand it also has CHF429.0m in cash, leading to a CHF264.0m net cash position.

How Healthy Is OC Oerlikon's Balance Sheet?

According to the last reported balance sheet, OC Oerlikon had liabilities of CHF1.12b due within 12 months, and liabilities of CHF866.0m due beyond 12 months. On the other hand, it had cash of CHF429.0m and CHF465.0m worth of receivables due within a year. So it has liabilities totalling CHF1.09b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since OC Oerlikon has a market capitalization of CHF3.26b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, OC Oerlikon boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, OC Oerlikon's EBIT fell a jaw-dropping 76% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine OC Oerlikon's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. OC Oerlikon 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. Over the last three years, OC Oerlikon actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While OC Oerlikon does have more liabilities than liquid assets, it also has net cash of CHF264.0m. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in CHF193m. So we are not troubled with OC Oerlikon's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for OC Oerlikon you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you decide to trade OC Oerlikon, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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 (at) simplywallst.com.