- Oops!Something went wrong.Please try again later.
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 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. We note that Ocular Therapeutix, Inc. (NASDAQ:OCUL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Ocular Therapeutix's Net Debt?
The image below, which you can click on for greater detail, shows that Ocular Therapeutix had debt of US$48.0m at the end of March 2021, a reduction from US$50.4m over a year. However, it does have US$209.4m in cash offsetting this, leading to net cash of US$161.4m.
How Strong Is Ocular Therapeutix's Balance Sheet?
According to the last reported balance sheet, Ocular Therapeutix had liabilities of US$27.4m due within 12 months, and liabilities of US$132.2m due beyond 12 months. Offsetting these obligations, it had cash of US$209.4m as well as receivables valued at US$13.6m due within 12 months. So it actually has US$63.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Ocular Therapeutix could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ocular Therapeutix boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Ocular Therapeutix 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, Ocular Therapeutix reported revenue of US$22m, which is a gain of 249%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Ocular Therapeutix?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ocular Therapeutix 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$53m and booked a US$131m accounting loss. With only US$161.4m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Ocular Therapeutix 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. 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. For example - Ocular Therapeutix has 4 warning signs we think you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.