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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Orion Oyj (HEL:ORNBV) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.
See our latest analysis for Orion Oyj
What Is Orion Oyj's Net Debt?
As you can see below, Orion Oyj had €32.0m of debt at June 2019, down from €151.4m a year prior. On the flip side, it has €27.2m in cash leading to net debt of about €4.80m.
How Strong Is Orion Oyj's Balance Sheet?
According to the last reported balance sheet, Orion Oyj had liabilities of €196.1m due within 12 months, and liabilities of €62.5m due beyond 12 months. On the other hand, it had cash of €27.2m and €228.5m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Orion Oyj's 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 €4.72b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Orion Oyj has virtually no net debt, so it's fair to say it does not have a heavy debt load!
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
With debt at a measly 0.018 times EBITDA and EBIT covering interest a whopping 58.1 times, it's clear that Orion Oyj is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. On the other hand, Orion Oyj's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orion Oyj'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.