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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.' 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, OncoCyte Corporation (NASDAQ:OCX) does carry debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. 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.
How Much Debt Does OncoCyte Carry?
The image below, which you can click on for greater detail, shows that OncoCyte had debt of US$1.68m at the end of September 2021, a reduction from US$4.13m over a year. However, it does have US$44.3m in cash offsetting this, leading to net cash of US$42.6m.
How Strong Is OncoCyte's Balance Sheet?
According to the last reported balance sheet, OncoCyte had liabilities of US$13.4m due within 12 months, and liabilities of US$55.6m due beyond 12 months. On the other hand, it had cash of US$44.3m and US$1.03m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.7m.
Since publicly traded OncoCyte shares are worth a total of US$254.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, OncoCyte also has more cash than debt, so we're pretty confident 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 OncoCyte'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.
Over 12 months, OncoCyte reported revenue of US$4.6m, which is a gain of 551%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is OncoCyte?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that OncoCyte 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$37m and booked a US$35m accounting loss. Given it only has net cash of US$42.6m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, OncoCyte's revenue growth is hot to trot. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for OncoCyte 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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