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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Outlook Therapeutics, Inc. (NASDAQ:OTLK) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Outlook Therapeutics's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Outlook Therapeutics had debt of US$11.3m, up from US$10.9m in one year. However, its balance sheet shows it holds US$37.2m in cash, so it actually has US$25.9m net cash.
How Healthy Is Outlook Therapeutics' Balance Sheet?
The latest balance sheet data shows that Outlook Therapeutics had liabilities of US$23.9m due within a year, and liabilities of US$562.8k falling due after that. Offsetting these obligations, it had cash of US$37.2m as well as receivables valued at US$800.0k due within 12 months. So it can boast US$13.5m more liquid assets than total liabilities.
This surplus suggests that Outlook Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Outlook Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Outlook Therapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Outlook Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 88%, to US$5.9m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Outlook Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Outlook Therapeutics 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$43m and booked a US$40m accounting loss. With only US$25.9m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Outlook Therapeutics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Outlook Therapeutics you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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