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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Orgenesis Inc. (NASDAQ:ORGS) makes use of debt. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Orgenesis's Debt?
The image below, which you can click on for greater detail, shows that Orgenesis had debt of US$10.9m at the end of September 2020, a reduction from US$14.6m over a year. However, its balance sheet shows it holds US$88.8m in cash, so it actually has US$77.9m net cash.
A Look At Orgenesis' Liabilities
According to the last reported balance sheet, Orgenesis had liabilities of US$12.4m due within 12 months, and liabilities of US$11.6m due beyond 12 months. On the other hand, it had cash of US$88.8m and US$4.28m worth of receivables due within a year. So it can boast US$69.1m more liquid assets than total liabilities.
This surplus strongly suggests that Orgenesis has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Orgenesis has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Orgenesis's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Orgenesis reported revenue of US$36m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Orgenesis?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Orgenesis had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$43m and booked a US$51m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$77.9m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Orgenesis (1 is potentially serious!) that you should be aware of before investing here.
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.
This article by Simply Wall St is general in nature. 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.
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