We Think Orbital Energy Group (NASDAQ:OEG) Has A Fair Chunk Of 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. Importantly, Orbital Energy Group, Inc. (NASDAQ:OEG) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Orbital Energy Group

How Much Debt Does Orbital Energy Group Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Orbital Energy Group had debt of US$30.0m, up from US$11.8m in one year. However, it also had US$11.2m in cash, and so its net debt is US$18.9m.

How Strong Is Orbital Energy Group's Balance Sheet?

We can see from the most recent balance sheet that Orbital Energy Group had liabilities of US$55.1m falling due within a year, and liabilities of US$22.1m due beyond that. On the other hand, it had cash of US$11.2m and US$32.0m worth of receivables due within a year. So its liabilities total US$33.9m more than the combination of its cash and short-term receivables.

Orbital Energy Group has a market capitalization of US$117.5m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Orbital Energy Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Orbital Energy Group wasn't profitable at an EBIT level, but managed to grow its revenue by 108%, to US$68m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Orbital Energy Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$55m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$50m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 3 warning signs for Orbital Energy Group 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. 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.