We Think OTAQ (LON:OTAQ) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, OTAQ plc (LON:OTAQ) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for OTAQ

What Is OTAQ's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 OTAQ had UK£1.96m of debt, an increase on none, over one year. On the flip side, it has UK£1.16m in cash leading to net debt of about UK£800.0k.

How Healthy Is OTAQ's Balance Sheet?

We can see from the most recent balance sheet that OTAQ had liabilities of UK£2.10m falling due within a year, and liabilities of UK£2.10m due beyond that. On the other hand, it had cash of UK£1.16m and UK£1.19m worth of receivables due within a year. So it has liabilities totalling UK£1.85m more than its cash and near-term receivables, combined.

Given OTAQ has a market capitalization of UK£10.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 4.0%, to UK£3.8m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, OTAQ had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£1.4m. 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£1.7m 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. 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 5 warning signs for OTAQ (of which 2 can't be ignored!) 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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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.