Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Osmotica Pharmaceuticals plc (NASDAQ:OSMT) does carry debt. But is this debt a concern to shareholders?
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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Osmotica Pharmaceuticals's Debt?
As you can see below, Osmotica Pharmaceuticals had US$268.4m of debt at June 2019, down from US$318.3m a year prior. On the flip side, it has US$63.7m in cash leading to net debt of about US$204.6m.
A Look At Osmotica Pharmaceuticals's Liabilities
Zooming in on the latest balance sheet data, we can see that Osmotica Pharmaceuticals had liabilities of US$97.9m due within 12 months and liabilities of US$288.0m due beyond that. Offsetting these obligations, it had cash of US$63.7m as well as receivables valued at US$68.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$254.0m.
The deficiency here weighs heavily on the US$156.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Osmotica Pharmaceuticals would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Osmotica Pharmaceuticals 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.
Over 12 months, Osmotica Pharmaceuticals saw its revenue drop to US$247m, which is a fall of 5.7%. That's not what we would hope to see.
Importantly, Osmotica Pharmaceuticals had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$15m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of-US$241.5m. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Osmotica Pharmaceuticals's profit, revenue, and operating cashflow have changed over the last few years.
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.
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