Health Check: How Prudently Does Orion Energy Systems (NASDAQ:OESX) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Orion Energy Systems, Inc. (NASDAQ:OESX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Orion Energy Systems

How Much Debt Does Orion Energy Systems Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Orion Energy Systems had debt of US$10.0m, up from US$35.0k in one year. However, its balance sheet shows it holds US$16.0m in cash, so it actually has US$5.97m net cash.

A Look At Orion Energy Systems' Liabilities

The latest balance sheet data shows that Orion Energy Systems had liabilities of US$24.5m due within a year, and liabilities of US$13.9m falling due after that. On the other hand, it had cash of US$16.0m and US$15.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$7.29m.

Of course, Orion Energy Systems has a market capitalization of US$51.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Orion Energy Systems also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Orion Energy Systems 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.

Over 12 months, Orion Energy Systems made a loss at the EBIT level, and saw its revenue drop to US$77m, which is a fall of 38%. To be frank that doesn't bode well.

So How Risky Is Orion Energy Systems?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Orion Energy Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$2.9m of cash and made a loss of US$34m. With only US$5.97m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Orion Energy Systems , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.