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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ocular Therapeutix, Inc. (NASDAQ:OCUL) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Ocular Therapeutix's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Ocular Therapeutix had US$51.5m of debt, an increase on US$48.8m, over one year. But on the other hand it also has US$84.3m in cash, leading to a US$32.8m net cash position.
How Strong Is Ocular Therapeutix's Balance Sheet?
We can see from the most recent balance sheet that Ocular Therapeutix had liabilities of US$13.8m falling due within a year, and liabilities of US$88.1m due beyond that. On the other hand, it had cash of US$84.3m and US$2.87m worth of receivables due within a year. So it has liabilities totalling US$14.7m more than its cash and near-term receivables, combined.
Given Ocular Therapeutix has a market capitalization of US$652.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ocular Therapeutix boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ocular Therapeutix'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.
In the last year Ocular Therapeutix wasn't profitable at an EBIT level, but managed to grow its revenue by 238%, to US$7.3m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Ocular Therapeutix?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ocular Therapeutix had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$74m and booked a US$103m accounting loss. Given it only has net cash of US$32.8m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Ocular Therapeutix's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Ocular Therapeutix that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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