Does Orexo (STO:ORX) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Orexo AB (publ) (STO:ORX) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Orexo

How Much Debt Does Orexo Carry?

You can click the graphic below for the historical numbers, but it shows that Orexo had kr224.1m of debt in September 2020, down from kr289.2m, one year before. But it also has kr593.3m in cash to offset that, meaning it has kr369.2m net cash.

How Strong Is Orexo's Balance Sheet?

We can see from the most recent balance sheet that Orexo had liabilities of kr407.0m falling due within a year, and liabilities of kr301.8m due beyond that. Offsetting this, it had kr593.3m in cash and kr213.2m in receivables that were due within 12 months. So it actually has kr97.7m more liquid assets than total liabilities.

This surplus suggests that Orexo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Orexo has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Orexo's EBIT fell a jaw-dropping 42% 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orexo's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Orexo 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, Orexo actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Orexo has net cash of kr369.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -kr94m, being 105% of its EBIT. So we don't have any problem with Orexo's use of debt. 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. For example, we've discovered 2 warning signs for Orexo (1 is significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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