Is OC Oerlikon (VTX: OERL) using too much debt?

David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, OC Oerlikon Corporation AG (VTX: OERL) carries the debt. But the real question is whether this debt makes the business risky.

What risk does debt entail?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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 look at debt levels, we first look at cash and debt levels, together.

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What is OC Oerlikon’s debt?

The image below, which you can click for more details, shows that in June 2021 OC Oerlikon had a debt of CHF 739.0 million, up from CHF 572.0 million in one year. On the other hand, it has CHF 527.0 million in cash, resulting in a net debt of around CHF 212.0 million.

Is OC Oerlikon’s track record healthy?

According to the last published balance sheet, OC Oerlikon had liabilities of 1.31 billion francs at less than 12 months and liabilities of 1.55 billion francs at more than 12 months. In return, he had CHF 527.0 million in cash and CHF 662.0 million in receivables due within 12 months. It therefore has liabilities totaling 1.66 billion francs more than its combined cash and short-term receivables.

While that may sound like a lot, it’s not so bad since OC Oerlikon has a market capitalization of CHF 2.98 billion, and so it could probably strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt.

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). Thus, we look at debt versus earnings with and without amortization expenses.

OC Oerlikon’s net debt is only 0.70 times its EBITDA. And its EBIT easily covers its interest costs, which is 1,000 times the size. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. It was also good to see that despite losing money on the EBIT line last year, OC Oerlikon has been a game-changer in the last 12 months, with EBIT of CHF 154 million. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine OC Oerlikon’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent profit before interest and taxes (EBIT) is supported by free cash flow. Over the past year, OC Oerlikon has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

Our point of view

OC Oerlikon’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we’re a little concerned with its total liability level. All these things considered, it looks like OC Oerlikon can comfortably manage its current debt levels. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. Considering that OC Oerlikon has a strong balance sheet, is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking on this link.

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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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.