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. 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. As with many other companies ORBCOMM Inc. (NASDAQ:ORBC) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does ORBCOMM Carry?
As you can see below, ORBCOMM had US$247.7m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$50.9m in cash offsetting this, leading to net debt of about US$196.8m.
A Look At ORBCOMM's Liabilities
We can see from the most recent balance sheet that ORBCOMM had liabilities of US$61.5m falling due within a year, and liabilities of US$285.7m due beyond that. On the other hand, it had cash of US$50.9m and US$61.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$234.7m.
This is a mountain of leverage relative to its market capitalization of US$312.4m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 ORBCOMM 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.
Over 12 months, ORBCOMM made a loss at the EBIT level, and saw its revenue drop to US$269m, which is a fall of 6.0%. We would much prefer see growth.
Over the last twelve months ORBCOMM produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$1.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$22m into a profit. So to be blunt we do think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting ORBCOMM insider transactions.
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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