Oricon Enterprises (NSE:ORICONENT) Has A Somewhat Strained Balance Sheet

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.' 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, Oricon Enterprises Limited (NSE:ORICONENT) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Oricon Enterprises

What Is Oricon Enterprises's Debt?

As you can see below, Oricon Enterprises had ₹850.4m of debt at March 2023, down from ₹1.62b a year prior. However, it does have ₹869.4m in cash offsetting this, leading to net cash of ₹19.0m.

How Healthy Is Oricon Enterprises' Balance Sheet?

The latest balance sheet data shows that Oricon Enterprises had liabilities of ₹1.44b due within a year, and liabilities of ₹619.5m falling due after that. On the other hand, it had cash of ₹869.4m and ₹1.27b worth of receivables due within a year. So it actually has ₹78.9m more liquid assets than total liabilities.

This surplus suggests that Oricon Enterprises has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Oricon Enterprises has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Oricon Enterprises improved its EBIT from a last year's loss to a positive ₹86m. There's no doubt that we learn most about debt from the balance sheet. But it is Oricon Enterprises's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Oricon Enterprises 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. During the last year, Oricon Enterprises burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Oricon Enterprises has net cash of ₹19.0m, as well as more liquid assets than liabilities. So while Oricon Enterprises does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Oricon Enterprises is showing 3 warning signs in our investment analysis , you should know about...

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.