Is Osmozis (EPA:ALOSM) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Osmozis SA (EPA:ALOSM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Osmozis

How Much Debt Does Osmozis Carry?

As you can see below, at the end of February 2021, Osmozis had €14.3m of debt, up from €13.1m a year ago. Click the image for more detail. However, because it has a cash reserve of €2.99m, its net debt is less, at about €11.3m.

A Look At Osmozis' Liabilities

Zooming in on the latest balance sheet data, we can see that Osmozis had liabilities of €4.14m due within 12 months and liabilities of €14.6m due beyond that. Offsetting this, it had €2.99m in cash and €4.98m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.8m.

This is a mountain of leverage relative to its market capitalization of €11.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Osmozis'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.

Over 12 months, Osmozis made a loss at the EBIT level, and saw its revenue drop to €8.3m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

While Osmozis's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €119k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €2.4m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Osmozis is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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