We Think Orgabio Holdings Berhad (KLSE:ORGABIO) Is Taking Some Risk With Its Debt

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.' 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. We note that Orgabio Holdings Berhad (KLSE:ORGABIO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Orgabio Holdings Berhad

What Is Orgabio Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Orgabio Holdings Berhad had debt of RM8.78m at the end of December 2023, a reduction from RM9.40m over a year. But it also has RM9.03m in cash to offset that, meaning it has RM250.0k net cash.

How Strong Is Orgabio Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Orgabio Holdings Berhad had liabilities of RM8.85m falling due within a year, and liabilities of RM8.81m due beyond that. Offsetting these obligations, it had cash of RM9.03m as well as receivables valued at RM15.0m due within 12 months. So it actually has RM6.36m more liquid assets than total liabilities.

This short term liquidity is a sign that Orgabio Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Orgabio Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Orgabio Holdings Berhad's EBIT fell a jaw-dropping 61% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Orgabio Holdings Berhad 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Orgabio Holdings Berhad 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. Over the last three years, Orgabio Holdings Berhad saw substantial negative free cash flow, in total. 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 Orgabio Holdings Berhad has net cash of RM250.0k, as well as more liquid assets than liabilities. So while Orgabio Holdings Berhad does not have a great balance sheet, it's certainly not too bad. 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. For example Orgabio Holdings Berhad has 5 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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. 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.