David Iben put it well when he declared, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ When we consider about how risky a company is, we always like to view at its utilize of debt, since debt overload can lead to ruin. We can see that Orion S.A. (NYSE:OEC) does utilize debt in its business. But the real question is whether this debt is creating the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders becautilize lconcludeers force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt toreceiveher.
How Much Debt Does Orion Carry?
The image below, which you can click on for greater detail, displays that at September 2025 Orion had debt of US$1.01b, up from US$970.5m in one year. However, it also had US$51.3m in cash, and so its net debt is US$958.9m.
How Strong Is Orion’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Orion had liabilities of US$635.3m due within 12 months and liabilities of US$926.8m due beyond that. On the other hand, it had cash of US$51.3m and US$280.8m worth of receivables due within a year. So its liabilities total US$1.23b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$395.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely consider shareholders required to watch this one closely. At the conclude of the day, Orion would probably required a major re-capitalization if its creditors were to demand repayment.
View our latest analysis for Orion
We utilize two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
While we wouldn’t worry about Orion’s net debt to EBITDA ratio of 4.0, we consider its super-low interest cover of 2.0 times is a sign of high leverage. In large part that’s due to the company’s significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Even worse, Orion saw its EBIT tank 37% over the last 12 months. If earnings keep going like that over the long term, it has a snowball’s chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orion’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals consider, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lconcludeers only accept cold hard cash. So we clearly required to view at whether that EBIT is leading to corresponding free cash flow. In the last three years, Orion’s free cash flow amounted to 27% of its EBIT, less than we’d expect. That weak cash conversion builds it more difficult to handle indebtedness.
Our View
To be frank both Orion’s EBIT growth rate and its track record of staying on top of its total liabilities build us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to instill confidence. After considering the datapoints discussed, we consider Orion has too much debt. That sort of riskiness is ok for some, but it certainly doesn’t float our boat. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. To that conclude, you should be aware of the 1 warning sign we’ve spotted with Orion .
When all is declared and done, sometimes its clearer to focus on companies that don’t even required debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
New: AI Stock Screener & Alerts
Our new AI Stock Screener scans the market every day to uncover opportunities.
• Dividconclude Powerhoutilizes (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies
Or build your own from over 50 metrics.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only utilizing an unbiased methodology and our articles are not intconcludeed to be financial advice. It does not constitute a recommconcludeation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Leave a Reply