Is Optomed Oyj (HEL:OPTOMED) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Optomed Oyj (HEL:OPTOMED) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Optomed Oyj

How Much Debt Does Optomed Oyj Carry?

You can click the graphic below for the historical numbers, but it shows that Optomed Oyj had €4.68m of debt in September 2023, down from €5.40m, one year before. But on the other hand it also has €9.57m in cash, leading to a €4.89m net cash position.

How Healthy Is Optomed Oyj's Balance Sheet?

According to the last reported balance sheet, Optomed Oyj had liabilities of €6.18m due within 12 months, and liabilities of €3.61m due beyond 12 months. Offsetting this, it had €9.57m in cash and €3.70m in receivables that were due within 12 months. So it actually has €3.47m more liquid assets than total liabilities.

This surplus suggests that Optomed Oyj has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Optomed Oyj boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Optomed Oyj can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Optomed Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to €15m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Optomed Oyj?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Optomed Oyj 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 €2.8m and booked a €4.3m accounting loss. But the saving grace is the €4.89m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for Optomed Oyj 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.

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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.