Organogenesis Holdings (NASDAQ: ORGO) Seems to Use Debt Quite Wisely
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Organogenesis Holdings Inc. (NASDAQ: ORGO) is in debt. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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 painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Organogenesis Holdings
What is the debt of OrganogenÃ¨se Holdings?
The image below, which you can click for more details, shows Organogenesis Holdings owed $ 73.9 million in debt at the end of September 2021, a reduction from $ 99.0 million. US dollars over one year. However, it has US $ 103.4 million in cash offsetting this, leading to net cash of US $ 29.6 million.
A look at the liabilities of OrganogenÃ¨se Holdings
According to the latest published balance sheet, Organogenesis Holdings had a liability of US $ 81.0 million due within 12 months and a liability of US $ 100.2 million due beyond 12 months. In return, he had $ 103.4 million in cash and $ 74.6 million in receivables due within 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.
Considering the size of Organogenesis Holdings, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the US $ 1.26 billion company struggling to find cash, we still think it’s worth watching its balance sheet. While it has some liabilities to note, Organogenesis Holdings also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Even more impressive was the fact that Organogenesis Holdings increased its EBIT by 2,154% year over year. This boost will make it even easier to pay down debt in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Organogenesis Holdings’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although Organogenesis Holdings has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) this cash balance. Over the past two years, OrganogenÃ¨se Holdings has recorded total negative free cash flow. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
We could understand if investors are concerned about the liabilities of OrganogenÃ¨se Holdings, but we can be reassured that it has net cash of $ 29.6 million. And we liked the appearance of the 2,154% year-over-year EBIT growth from last year. We are therefore not concerned with the use of the debt of OrganogenÃ¨se Holdings. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Organogenesis Holdings which you should know before investing here.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
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