Is OTAQ (LON:OTAQ) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that OTAQ plc (LON:OTAQ) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for OTAQ

How Much Debt Does OTAQ Carry?

As you can see below, at the end of March 2021, OTAQ had UK£2.00m of debt, up from UK£486.0k a year ago. Click the image for more detail. However, it does have UK£3.12m in cash offsetting this, leading to net cash of UK£1.12m.

A Look At OTAQ's Liabilities

According to the last reported balance sheet, OTAQ had liabilities of UK£2.46m due within 12 months, and liabilities of UK£2.30m due beyond 12 months. Offsetting this, it had UK£3.12m in cash and UK£939.0k in receivables that were due within 12 months. So its liabilities total UK£699.0k more than the combination of its cash and short-term receivables.

Given OTAQ has a market capitalization of UK£11.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, OTAQ 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 it is OTAQ's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year OTAQ wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to UK£4.1m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is OTAQ?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year OTAQ had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of UK£1.6m and booked a UK£534k accounting loss. With only UK£1.12m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for OTAQ (of which 1 doesn't sit too well with us!) 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. 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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