Is Orion Oyj (HEL:ORNBV) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Orion Oyj (HEL:ORNBV) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Orion Oyj

How Much Debt Does Orion Oyj Carry?

As you can see below, Orion Oyj had €100.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has €216.7m in cash to offset that, meaning it has €116.7m net cash.

How Healthy Is Orion Oyj's Balance Sheet?

According to the last reported balance sheet, Orion Oyj had liabilities of €209.2m due within 12 months, and liabilities of €156.9m due beyond 12 months. On the other hand, it had cash of €216.7m and €187.5m worth of receivables due within a year. So it actually has €38.1m more liquid assets than total liabilities.

This state of affairs indicates that Orion Oyj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €5.46b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Orion Oyj has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Orion Oyj's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orion Oyj'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Orion Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Orion Oyj generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Orion Oyj has net cash of €116.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €131m, being 81% of its EBIT. So we are not troubled with Orion Oyj's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Orion Oyj , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.