Orbit Exports (NSE:ORBTEXP) has a fairly healthy balance sheet

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 “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Orbit Exports Limited (NSE:ORBTEXP) uses debt. But the real question is whether this debt makes the business risky.

Why is debt risky?

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. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. 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 consider cash and debt levels, together.

See our latest analysis for Orbit Exports

How much debt does Orbit Exports have?

The image below, which you can click on for more details, shows that as of September 2021, Orbit Exports had a debt of ₹485.6m, up from ₹102.4m in a year. However, he also had ₹299.5 million in cash, and hence his net debt is ₹186.2 million.

NSEI: ORBTEXP Debt to Equity February 13, 2022

How healthy is Orbit Exports’ balance sheet?

According to the latest published balance sheet, Orbit Exports had liabilities of ₹366.2 million due within 12 months and liabilities of ₹435.0 million due beyond 12 months. On the other hand, it had cash of ₹299.5 million and ₹198.1 million of receivables due within one year. It therefore has liabilities totaling ₹303.7 million more than its cash and short-term receivables, combined.

Given that Orbit Exports has a market capitalization of ₹3.08 billion, it is hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Orbit Exports’ net debt is only 0.82 times its EBITDA. And its EBIT covers its interest charges 43.2 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Even better, Orbit Exports increased its EBIT by 545% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; as Orbit Exports will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, while the taxman may love accounting profits, lenders only accept cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Orbit Exports has created free cash flow of 17% of its EBIT, an uninspiring performance. This low level of cash conversion compromises its ability to manage and repay its debt.

Our point of view

Orbit Exports’ interest coverage suggests they can manage their debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But, on a darker note, we are a bit concerned about its conversion of EBIT into free cash flow. Given all of this data, it seems to us that Orbit Exports is taking a pretty sensible approach to debt. This means they take on a bit more risk, hoping to increase shareholder returns. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 4 warning signs for Orbit Exports you should know, and one of them makes us a little uneasy.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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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