These 4 Measures Indicate That Organogenesis Holdings (NASDAQ:ORGO) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Organogenesis Holdings Inc. (NASDAQ:ORGO) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Organogenesis Holdings

What Is Organogenesis Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Organogenesis Holdings had debt of US$69.8m at the end of March 2021, a reduction from US$93.1m over a year. However, its balance sheet shows it holds US$77.5m in cash, so it actually has US$7.71m net cash.

How Healthy Is Organogenesis Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Organogenesis Holdings had liabilities of US$74.0m due within 12 months and liabilities of US$87.9m due beyond that. Offsetting this, it had US$77.5m in cash and US$72.0m in receivables that were due within 12 months. So its liabilities total US$12.4m 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$2.04b 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!

We also note that Organogenesis Holdings improved its EBIT from a last year's loss to a positive US$57m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last year, Organogenesis Holdings barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

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$7.71m. So we are not troubled with Organogenesis Holdings's debt use. 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. For instance, we've identified 5 warning signs for Organogenesis Holdings (1 is potentially serious) you should be aware of.

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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