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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies OptiNose, Inc. (NASDAQ:OPTN) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does OptiNose Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 OptiNose had US$104.9m of debt, an increase on US$72.9m, over one year. But it also has US$125.3m in cash to offset that, meaning it has US$20.3m net cash.
How Healthy Is OptiNose's Balance Sheet?
We can see from the most recent balance sheet that OptiNose had liabilities of US$34.9m falling due within a year, and liabilities of US$105.5m due beyond that. On the other hand, it had cash of US$125.3m and US$14.1m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to OptiNose's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$317.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, OptiNose also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 OptiNose'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 OptiNose wasn't profitable at an EBIT level, but managed to grow its revenue by 152%, to US$41m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is OptiNose?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that OptiNose 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$85.2m and booked a US$108.5m accounting loss. However, it has net cash of US$20.3m, so it has a bit of time before it will need more capital. The good news for shareholders is that OptiNose has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that OptiNose is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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