We Think Oricon Enterprises (NSE:ORICONENT) Has A Fair Chunk Of Debt

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 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 note that Oricon Enterprises Limited (NSE:ORICONENT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Oricon Enterprises

What Is Oricon Enterprises's Debt?

The image below, which you can click on for greater detail, shows that Oricon Enterprises had debt of ₹2.29b at the end of September 2020, a reduction from ₹3.99b over a year. However, it does have ₹2.16b in cash offsetting this, leading to net debt of about ₹136.1m.

A Look At Oricon Enterprises' Liabilities

According to the last reported balance sheet, Oricon Enterprises had liabilities of ₹2.72b due within 12 months, and liabilities of ₹1.54b due beyond 12 months. On the other hand, it had cash of ₹2.16b and ₹1.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹541.1m.

Since publicly traded Oricon Enterprises shares are worth a total of ₹3.56b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Oricon Enterprises will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Oricon Enterprises made a loss at the EBIT level, and saw its revenue drop to ₹6.7b, which is a fall of 36%. That makes us nervous, to say the least.

Caveat Emptor

While Oricon Enterprises's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹150m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹69m. So in short it's a really risky stock. 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. Take risks, for example - Oricon Enterprises has 4 warning signs (and 1 which is potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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