Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Organogenesis Holdings Inc. (NASDAQ:ORGO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Organogenesis Holdings's Debt?
As you can see below, Organogenesis Holdings had US$64.9m of debt at March 2024, down from US$69.9m a year prior. But it also has US$88.6m in cash to offset that, meaning it has US$23.8m net cash.
A Look At Organogenesis Holdings' Liabilities
According to the last reported balance sheet, Organogenesis Holdings had liabilities of US$82.8m due within 12 months, and liabilities of US$97.7m due beyond 12 months. Offsetting this, it had US$88.6m in cash and US$96.1m in receivables that were due within 12 months. So it actually has US$4.32m more liquid assets than total liabilities.
Having regard to Organogenesis Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$392.4m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Organogenesis Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Organogenesis Holdings's load is not too heavy, because its EBIT was down 35% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Organogenesis Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Organogenesis Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Organogenesis Holdings's free cash flow amounted to 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Organogenesis Holdings has net cash of US$23.8m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Organogenesis Holdings's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Organogenesis Holdings has 2 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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 using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused 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.