ORION Holdings (KRX:001800) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 ORION Holdings Corp. (KRX:001800) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ORION Holdings

How Much Debt Does ORION Holdings Carry?

The image below, which you can click on for greater detail, shows that ORION Holdings had debt of ₩358.0b at the end of September 2020, a reduction from ₩388.7b over a year. But it also has ₩482.5b in cash to offset that, meaning it has ₩124.5b net cash.

A Look At ORION Holdings' Liabilities

We can see from the most recent balance sheet that ORION Holdings had liabilities of ₩448.3b falling due within a year, and liabilities of ₩583.0b due beyond that. On the other hand, it had cash of ₩482.5b and ₩167.0b worth of receivables due within a year. So its liabilities total ₩381.8b more than the combination of its cash and short-term receivables.

ORION Holdings has a market capitalization of ₩797.1b, so it could very likely raise cash to ameliorate 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 positive, ORION Holdings grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ORION Holdings 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, ORION Holdings produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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 ₩124.5b. And it impressed us with its EBIT growth of 30% over the last year. So we don't think ORION Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with ORION Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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