Would Orexo (STO:ORX) be better off with less debt?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Orexo AB (publisher) (STO:ORX) has debt on its balance sheet. But does this debt worry shareholders?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those 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. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Orexo

What is Orexo’s debt?

As you can see below, Orexo had 493.5 million kr in debt, as of June 2022, which is about the same as the previous year. You can click on the graph for more details. However, as he has a cash reserve of 467.7 million kr, his net debt is lower at around 25.8 million kr.

OM: ORX Debt to Equity History September 9, 2022

How healthy is Orexo’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Orexo had liabilities of 431.1 million kr due within 12 months and liabilities of 531.0 million kr due beyond. On the other hand, it had a cash position of 467.7 million kr and 329.9 million kr of receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 164.5 million kr.

Orexo has a market capitalization of 753.8 million kr, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Orexo’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

On a 12-month basis, Orexo posted revenue of 597 million kr, a gain of 2.2%, although it reported no earnings before interest and taxes. We generally like to see faster growth from unprofitable businesses, but each in its own way.

Caveat Emptor

Importantly, Orexo posted a loss in earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was a whopping kr190m. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. Quite frankly, we think the track record falls short, although it could improve over time. However, it doesn’t help that he burned 241 million kr in cash in the last year. So suffice it to say that we consider the stock to be very risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Orexo you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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

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