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Health Check: How Prudently Does Ontrak (NASDAQ:OTRK) Use Debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Ontrak, Inc. (NASDAQ:OTRK) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ontrak

What Is Ontrak's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Ontrak had US$47.0m of debt, an increase on US$33.3m, over one year. However, it does have US$92.5m in cash offsetting this, leading to net cash of US$45.4m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Ontrak's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ontrak had liabilities of US$40.6m due within 12 months and liabilities of US$47.6m due beyond that. Offsetting these obligations, it had cash of US$92.5m as well as receivables valued at US$18.2m due within 12 months. So it can boast US$22.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Ontrak could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ontrak has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ontrak's ability to maintain a healthy balance sheet going forward. 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 Ontrak wasn't profitable at an EBIT level, but managed to grow its revenue by 144%, to US$99m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Ontrak?

Although Ontrak had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$726k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 144% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Ontrak you should know about.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.