Health Check: How Prudently Does Orchestra BioMed Holdings (NASDAQ:OBIO) Use 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 Orchestra BioMed Holdings, Inc. (NASDAQ:OBIO) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Orchestra BioMed Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Orchestra BioMed Holdings had US$14.3m of debt, an increase on none, over one year. However, it does have US$66.8m in cash offsetting this, leading to net cash of US$52.5m.

How Strong Is Orchestra BioMed Holdings' Balance Sheet?

According to the last reported balance sheet, Orchestra BioMed Holdings had liabilities of US$16.2m due within 12 months, and liabilities of US$27.0m due beyond 12 months. Offsetting these obligations, it had cash of US$66.8m as well as receivables valued at US$92.0k due within 12 months. So it actually has US$23.7m more liquid assets than total liabilities.

This excess liquidity suggests that Orchestra BioMed Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Orchestra BioMed Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Orchestra BioMed Holdings 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 .

See our latest analysis for Orchestra BioMed Holdings

Over 12 months, Orchestra BioMed Holdings made a loss at the EBIT level, and saw its revenue drop to US$2.6m, which is a fall of 4.4%. That's not what we would hope to see.

So How Risky Is Orchestra BioMed Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Orchestra BioMed Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$51m and booked a US$61m accounting loss. However, it has net cash of US$52.5m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Orchestra BioMed Holdings , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.