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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ORIOR AG (VTX:ORON) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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, 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 ORIOR
What Is ORIOR's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 ORIOR had debt of CHF176.5m, up from CHF150.2m in one year. However, it also had CHF30.6m in cash, and so its net debt is CHF145.9m.
How Healthy Is ORIOR's Balance Sheet?
According to the last reported balance sheet, ORIOR had liabilities of CHF85.1m due within 12 months, and liabilities of CHF206.6m due beyond 12 months. Offsetting this, it had CHF30.6m in cash and CHF60.4m in receivables that were due within 12 months. So it has liabilities totalling CHF200.7m more than its cash and near-term receivables, combined.
This deficit isn't so bad because ORIOR is worth CHF536.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.