Is ORION Holdings (KRX:001800) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, ORION Holdings Corp. (KRX:001800) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for ORION Holdings

What Is ORION Holdings's Debt?

As you can see below, ORION Holdings had ₩309.2b of debt at December 2020, down from ₩346.8b a year prior. But it also has ₩471.7b in cash to offset that, meaning it has ₩162.5b net cash.

A Look At ORION Holdings' Liabilities

We can see from the most recent balance sheet that ORION Holdings had liabilities of ₩438.2b falling due within a year, and liabilities of ₩564.6b due beyond that. Offsetting this, it had ₩471.7b in cash and ₩167.2b in receivables that were due within 12 months. So its liabilities total ₩364.0b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because ORION Holdings is worth ₩1.09t, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, ORION Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that ORION Holdings grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ORION Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ORION Holdings 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 Holdings produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although ORION Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩162.5b. And it impressed us with free cash flow of ₩253b, being 71% of its EBIT. So is ORION Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ORION Holdings 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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