Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Mostly, Orion Group Holdings, Inc. (NYSE: ORN) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Orion Group Holdings
What is the debt of Orion Group Holdings?
You can click on the graph below for historical figures, but it shows Orion Group Holdings owed US $ 6.43 million in debt as of June 2021, up from US $ 54.1 million a year earlier. However, it has $ 2.41 million in cash offsetting that, which leads to net debt of around $ 4.02 million.
How healthy is Orion Group Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Orion Group Holdings had liabilities of US $ 169.9 million due within 12 months and US $ 46.3 million liabilities beyond. In compensation for these obligations, it had cash of US $ 2.41 million as well as receivables valued at US $ 219.2 million maturing within 12 months. He can therefore avail himself of $ 5.47 million in liquid assets more than total Liabilities.
This short-term liquidity is a sign that Orion Group Holdings could likely repay its debt with ease, as its balance sheet is far from tight.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Given that net debt is only 0.11 times EBITDA, it is first surprising to see that Orion Group Holdings’ EBIT has low interest coverage of 1.5 times. So while we are not necessarily alarmed, we think his debt is far from negligible. Shareholders should know that Orion Group Holdings’ EBIT fell 52% last year. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Orion Group Holdings can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past two years, Orion Group Holdings has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
We were not impressed with Orion Group Holdings’ interest coverage and its EBIT growth rate made us cautious. But like a ballerina finishing on a perfect spin, she has no trouble converting her EBIT into free cash flow. Given this range of data points, we believe Orion Group Holdings is well positioned to manage its debt levels. But beware: we believe debt levels are high enough to warrant continued monitoring. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 1 warning sign for Orion Group Holdings that you need to be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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