Here's Why Organogenesis Holdings (NASDAQ:ORGO) Can Manage Its Debt Responsibly

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.' 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, Organogenesis Holdings Inc. (NASDAQ:ORGO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Organogenesis Holdings

What Is Organogenesis Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Organogenesis Holdings had US$73.0m of debt, an increase on US$69.8m, over one year. However, it does have US$109.2m in cash offsetting this, leading to net cash of US$36.2m.

How Healthy Is Organogenesis Holdings' Balance Sheet?

We can see from the most recent balance sheet that Organogenesis Holdings had liabilities of US$76.8m falling due within a year, and liabilities of US$116.3m due beyond that. Offsetting this, it had US$109.2m in cash and US$79.5m in receivables that were due within 12 months. So its liabilities total US$4.33m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Organogenesis Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$658.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Organogenesis Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Organogenesis Holdings grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Organogenesis Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Organogenesis Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Organogenesis Holdings recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Organogenesis Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$36.2m. And it also grew its EBIT by 13% over the last year. So we are not troubled with Organogenesis Holdings's debt use. 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. Case in point: We've spotted 3 warning signs for Organogenesis Holdings you should be aware of, and 1 of them can't be ignored.

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.