We Think Osirium Technologies (LON:OSI) Has A Fair Chunk Of Debt

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. We can see that Osirium Technologies PLC (LON:OSI) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Osirium Technologies

How Much Debt Does Osirium Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Osirium Technologies had UK£2.50m of debt, an increase on UK£2.35m, over one year. However, because it has a cash reserve of UK£1.48m, its net debt is less, at about UK£1.02m.

How Strong Is Osirium Technologies' Balance Sheet?

According to the last reported balance sheet, Osirium Technologies had liabilities of UK£2.14m due within 12 months, and liabilities of UK£2.52m due beyond 12 months. On the other hand, it had cash of UK£1.48m and UK£697.0k worth of receivables due within a year. So it has liabilities totalling UK£2.48m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Osirium Technologies has a market capitalization of UK£7.20m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Osirium Technologies'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.

In the last year Osirium Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to UK£1.4m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Osirium Technologies managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable UK£2.9m at the EBIT level. 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 UK£2.3m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Osirium Technologies is showing 6 warning signs in our investment analysis , and 2 of those are potentially serious...

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. 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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