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

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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Organogenesis Holdings Inc. (NASDAQ:ORGO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 Organogenesis Holdings had US$73.9m of debt in September 2021, down from US$99.0m, one year before. But it also has US$103.4m in cash to offset that, meaning it has US$29.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Organogenesis Holdings' Balance Sheet?

The latest balance sheet data shows that Organogenesis Holdings had liabilities of US$81.0m due within a year, and liabilities of US$100.2m falling due after that. On the other hand, it had cash of US$103.4m and US$74.6m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Organogenesis Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$940.4m 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!

Better yet, Organogenesis Holdings grew its EBIT by 2,154% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Organogenesis Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Organogenesis Holdings recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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$29.6m. And we liked the look of last year's 2,154% year-on-year EBIT growth. So we don't have any problem with Organogenesis Holdings's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Organogenesis Holdings you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.