Is Orion Energy Systems (NASDAQ:OESX) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Orion Energy Systems, Inc. (NASDAQ:OESX) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Orion Energy Systems

How Much Debt Does Orion Energy Systems Carry?

As you can see below, at the end of June 2023, Orion Energy Systems had US$10.0m of debt, up from none a year ago. Click the image for more detail. However, it also had US$8.25m in cash, and so its net debt is US$1.75m.

How Strong Is Orion Energy Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Orion Energy Systems had liabilities of US$22.3m due within 12 months and liabilities of US$15.0m due beyond that. On the other hand, it had cash of US$8.25m and US$15.8m worth of receivables due within a year. So it has liabilities totalling US$13.3m more than its cash and near-term receivables, combined.

Orion Energy Systems has a market capitalization of US$35.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Orion Energy Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Orion Energy Systems had a loss before interest and tax, and actually shrunk its revenue by 28%, to US$77m. That makes us nervous, to say the least.

Caveat Emptor

While Orion Energy Systems's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$14m at the EBIT level. 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. Another cause for caution is that is bled US$5.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Orion Energy Systems you should know about.

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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