Orion Oyj (HEL:ORNBV) Could Easily Take On More 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 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. We can see that Orion Oyj (HEL:ORNBV) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

What Is Orion Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Orion Oyj had €205.9m of debt, an increase on €100.0m, over one year. But on the other hand it also has €332.6m in cash, leading to a €126.7m net cash position.

A Look At Orion Oyj's Liabilities

We can see from the most recent balance sheet that Orion Oyj had liabilities of €275.4m falling due within a year, and liabilities of €320.1m due beyond that. On the other hand, it had cash of €332.6m and €196.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €66.2m.

Having regard to Orion Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €6.21b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Orion Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Orion Oyj grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Orion Oyj can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Orion Oyj's liabilities, but we can be reassured by the fact it has has net cash of €126.7m. And we liked the look of last year's 83% year-on-year EBIT growth. So is Orion Oyj's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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.