Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Organogenesis Holdings Inc. (NASDAQ:ORGO) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Organogenesis Holdings

How Much Debt Does Organogenesis Holdings Carry?

The image below, which you can click on for greater detail, shows that Organogenesis Holdings had debt of US$69.8m at the end of March 2021, a reduction from US$93.1m over a year. However, it does have US$77.5m in cash offsetting this, leading to net cash of US$7.71m.

How Strong Is Organogenesis Holdings' Balance Sheet?

The latest balance sheet data shows that Organogenesis Holdings had liabilities of US$74.0m due within a year, and liabilities of US$87.9m falling due after that. Offsetting these obligations, it had cash of US$77.5m as well as receivables valued at US$72.0m due within 12 months. So its liabilities total US$12.4m more than the combination of its cash and short-term receivables.

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$1.92b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Organogenesis Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Organogenesis Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of US$57m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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. While Organogenesis Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Organogenesis Holdings barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing up

We could understand if investors are concerned about Organogenesis Holdings's liabilities, but we can be reassured by the fact it has has net cash of US$7.71m. So we don't have any problem with Organogenesis Holdings's use of debt. 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 end, you should learn about the 5 warning signs we've spotted with Organogenesis Holdings (including 1 which is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. 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.

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