Is Orbital Energy Group (NASDAQ: OEG) Using Too Much Debt?
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. It’s only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies Orbital Energy Group, Inc. (NASDAQ: OEG) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth 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 Orbital Energy Group
What is Orbital Energy Group’s net debt?
The image below, which you can click for more details, shows that in September 2021, Orbital Energy Group was in debt of US $ 30.0 million, up from US $ 11.8 million in one year. . However, given that it has a cash reserve of US $ 11.2 million, its net debt is less, at around US $ 18.9 million.
How strong is Orbital Energy Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Orbital Energy Group had liabilities of US $ 55.1 million due within 12 months and US $ 22.1 million liabilities beyond. On the other hand, it had US $ 11.2 million in cash and US $ 32.0 million in receivables due within one year. It therefore has a liability totaling US $ 33.9 million more than its combined cash and short-term receivables.
Orbital Energy Group has a market capitalization of US $ 155.8 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Orbital Energy Group’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, Orbital Energy Group has not been profitable in terms of EBIT, but has managed to increase its revenue by 108%, to $ 68 million. Its fairly obvious shareholders are therefore hoping for more growth!
Even though Orbital Energy Group has managed to grow its revenue quite adroitly, the hard truth is that it is losing money on the EBIT line. His EBIT loss was US $ 55 million. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that US $ 50 million has been lost in negative free cash flow over the past twelve months. In short, it’s a really risky title. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, Orbital Energy Group has 3 warning signs (and 1 that shouldn’t be ignored) we think you should 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.
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 shares 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.
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