Is Orvana Minerals (TSE:ORV) A Risky Investment?
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. 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. Importantly, Orvana Minerals Corp. (TSE:ORV) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Orvana Minerals
What Is Orvana Minerals's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Orvana Minerals had US$20.6m of debt in June 2019, down from US$21.7m, one year before. However, it does have US$11.7m in cash offsetting this, leading to net debt of about US$8.91m.
How Strong Is Orvana Minerals's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Orvana Minerals had liabilities of US$43.5m due within 12 months and liabilities of US$38.7m due beyond that. Offsetting this, it had US$11.7m in cash and US$2.75m in receivables that were due within 12 months. So its liabilities total US$67.8m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$21.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Orvana Minerals would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Orvana Minerals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Orvana Minerals made a loss at the EBIT level, and saw its revenue drop to US$139m, which is a fall of 10%. We would much prefer see growth.
Caveat Emptor
Not only did Orvana Minerals's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$1.7m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$1.2m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Orvana Minerals's profit, revenue, and operating cashflow have changed over the last few years.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
