Origo hf (ICE:ORIGO) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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 Origo hf. (ICE:ORIGO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Origo hf

What Is Origo hf's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Origo hf had debt of Kr743.3m, up from Kr640.1m in one year. But it also has Kr1.17b in cash to offset that, meaning it has Kr429.5m net cash.

How Strong Is Origo hf's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Origo hf had liabilities of Kr3.41b due within 12 months and liabilities of Kr1.95b due beyond that. Offsetting this, it had Kr1.17b in cash and Kr1.71b in receivables that were due within 12 months. So it has liabilities totalling Kr2.47b more than its cash and near-term receivables, combined.

Of course, Origo hf has a market capitalization of Kr20.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Origo hf boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably Origo hf's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. There's no doubt that we learn most about debt from the balance sheet. But it is Origo hf's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Origo hf 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 three years, Origo hf generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While Origo hf does have more liabilities than liquid assets, it also has net cash of Kr429.5m. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in Kr861m. So we are not troubled with Origo hf's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Origo hf is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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