Here’s why Organogenesis Holdings (NASDAQ:ORGO) can manage its debt responsibly
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a 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 Organogenesis Holdings Inc. (NASDAQ:ORGO) has debt on its balance sheet. But does this debt worry shareholders?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Organogenesis Holdings
How much debt does Organogenesis Holdings have?
As you can see below, Organogenesis Holdings had $72.6 million in debt as of June 2022, about the same as the previous year. You can click on the graph for more details. However, he has $113.2 million in cash to offset that, which translates to a net cash of $40.7 million.
How healthy is Organogenesis Holdings’ balance sheet?
We can see from the most recent balance sheet that Organogenesis Holdings had liabilities of US$88.2 million maturing within one year, and liabilities of US$113.7 million due beyond . On the other hand, it had a cash position of 113.2 million dollars and 88.8 million dollars of receivables at less than one year. Thus, its total liabilities match its short-term liquid assets almost perfectly.
This state of affairs indicates that Organogenesis Holdings’ balance sheet looks quite strong, as its total liabilities roughly equal its cash. So while it’s hard to imagine the $417.5 million company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. Simply put, the fact that Organogenesis Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
In fact, Organogenesis Holdings’ saving grace is its low level of leverage, as its EBIT has fallen 31% over the past twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Organogenesis 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.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Organogenesis Holdings has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past two years, Organogenesis Holdings has recorded free cash flow of 37% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.
While it’s always a good idea to investigate a company’s debt, in this case Organogenesis Holdings has $40.7 million in net cash and a decent balance sheet. So we have no problem with Organogenesis Holdings’ use of debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Organogenesis Holdings you should be aware.
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.
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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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