Does Ormat Technologies (NYSE: ORA) have a healthy balance sheet?
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. We can see that Ormat Technologies, Inc. (NYSE: ORA) uses debt in its business. But does this debt concern shareholders?
When is debt a problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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. 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 Ormat Technologies
What is Ormat Technologies’ net debt?
The image below, which you can click for more details, shows that in June 2021, Ormat Technologies was in debt of US $ 1.42 billion, up from US $ 1.35 billion in a year. However, it has US $ 296.0 million in cash offsetting this, which leads to net debt of around US $ 1.12 billion.
How healthy is Ormat Technologies’ balance sheet?
According to the latest published balance sheet, Ormat Technologies had liabilities of US $ 246.2 million due within 12 months and liabilities of US $ 1.60 billion due beyond 12 months. In return, he had $ 296.0 million in cash and $ 162.9 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 1.39 billion.
This deficit is not that big as Ormat Technologies is worth US $ 3.91 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we look at debt over earnings with and without amortization charges.
While we are not worried about Ormat Technologies’ net debt to EBITDA ratio of 3.3, we do believe its ultra-low 2.2x interest coverage is a sign of high leverage. This is in large part due to the company’s large depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of profit, and its debt may be heavier than it appears. At first glance. Shareholders should therefore probably be aware that interest charges seem to have had a real impact on the company in recent times. Another concern for investors could be that Ormat Technologies’ EBIT fell 16% last year. If things continue like this, managing debt will be about as easy as putting an angry house cat in its travel box. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Ormat Technologies can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Ormat Technologies has recorded substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
To be frank, Ormat Technologies’ EBIT growth rate and track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But at least his total liability level isn’t that bad. Overall, it seems to us that Ormat Technologies’ balance sheet is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should keep a close eye on its liquidity. 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, we discovered 2 warning signs for Ormat Technologies (1 is potentially serious!) Which you should be aware of before investing here.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.