Is Orian Sh.M (TLV:ORIN) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Orian Sh.M. Ltd. (TLV:ORIN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 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 Orian Sh.M

What Is Orian Sh.M's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Orian Sh.M had US$94.6m of debt, an increase on US$65.5m, over one year. However, it also had US$20.6m in cash, and so its net debt is US$74.1m.

A Look At Orian Sh.M's Liabilities

According to the last reported balance sheet, Orian Sh.M had liabilities of US$109.9m due within 12 months, and liabilities of US$215.3m due beyond 12 months. Offsetting these obligations, it had cash of US$20.6m as well as receivables valued at US$99.0m due within 12 months. So its liabilities total US$205.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$188.8m, we think shareholders really should watch Orian Sh.M's debt levels, like a parent watching their child ride a bike for the first time. 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Orian Sh.M's debt to EBITDA ratio (4.1) suggests that it uses some debt, its interest cover is very weak, at 2.5, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. More concerning, Orian Sh.M saw its EBIT drop by 5.5% in the last twelve months. If it keeps going like that paying off its debt will be like running on a treadmill -- a lot of effort for not much advancement. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Orian Sh.M 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Orian Sh.M saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Mulling over Orian Sh.M's attempt at converting EBIT to free cash flow, we're certainly not enthusiastic. And even its net debt to EBITDA fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like Orian Sh.M has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. Be aware that Orian Sh.M is showing 4 warning signs in our investment analysis , and 3 of those are concerning...

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.