Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. 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. We can see that Orient Refractories Limited (NSE: ORIENTREF) uses debt in its activity. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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 review for Orient Refractories
What is the debt of Orient Refractories?
You can click on the graph below for historical figures, but it shows that in March 2021 Orient Refractories had a debt of 598.1 million yen, an increase from none, year over year. However, it has 1.61 billion yen in cash offsetting this, which leads to a net cash position of 1.02 billion yen.
Is Orient Refractories’ balance sheet healthy?
We can see from the most recent balance sheet that Orient Refractories had liabilities of 3.91 billion yen due within one year and liabilities of 626.8 million yen beyond. In compensation for these obligations, he had cash of 1.61 billion euros as well as receivables valued at 3.89 billion euros within 12 months. So he actually ₹ 964.6m After liquid assets as total liabilities.
This indicates that Orient Refractories’ balance sheet looks quite strong, as its total liabilities roughly equal its cash. So 51.4b company is highly unlikely to run out of cash, but it’s always worth keeping an eye on the balance sheet. In short, Orient Refractories has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!
On top of that, we are happy to report that Orient Refractories has increased its EBIT by 61%, reducing the specter of future debt repayments. 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 Orient Refractories can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Orient Refractories may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Orient Refractories’ free cash flow has been 33% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
In summary
While we sympathize with investors who find debt worrying, you should keep in mind that Orient Refractories has net cash of 1.02 billion yen, as well as more liquid assets than liabilities. And it impressed us with its 61% EBIT growth compared to last year. We therefore do not believe that the use of debt by Orient Refractories is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 3 warning signs for Orient Refractories which you should know before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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