Is Orrön Energy (STO:ORRON) Using Too Much Debt?

Warren Buffett famously said, '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, Orrön Energy AB (publ) (STO:ORRON) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Orrön Energy

What Is Orrön Energy's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Orrön Energy had debt of €83.0m, up from none in one year. However, it does have €28.0m in cash offsetting this, leading to net debt of about €55.0m.

How Strong Is Orrön Energy's Balance Sheet?

The latest balance sheet data shows that Orrön Energy had liabilities of €27.4m due within a year, and liabilities of €100.1m falling due after that. Offsetting this, it had €28.0m in cash and €1.10m in receivables that were due within 12 months. So it has liabilities totalling €98.4m more than its cash and near-term receivables, combined.

Orrön Energy has a market capitalization of €185.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Orrön Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least Orrön Energy booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, Orrön Energy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €3.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of €6.9m. So in short it's a really risky stock. For riskier companies like Orrön Energy I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.