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. Importantly, ORBCOMM Inc. (NASDAQ:ORBC) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is ORBCOMM's Net Debt?
As you can see below, ORBCOMM had US$247.6m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$54.8m in cash offsetting this, leading to net debt of about US$192.8m.
A Look At ORBCOMM's Liabilities
Zooming in on the latest balance sheet data, we can see that ORBCOMM had liabilities of US$54.1m due within 12 months and liabilities of US$283.1m due beyond that. Offsetting these obligations, it had cash of US$54.8m as well as receivables valued at US$59.7m due within 12 months. So it has liabilities totalling US$222.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since ORBCOMM has a market capitalization of US$413.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ORBCOMM's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year ORBCOMM actually shrunk its revenue by 4.8%, to US$271m. We would much prefer see growth.
Over the last twelve months ORBCOMM produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$5.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of-US$20.9m. So we do think this stock is quite risky. For riskier companies like ORBCOMM I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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