Is Otovo (OB:OTOVO) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Otovo ASA (OB:OTOVO) does have debt on its balance sheet. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Otovo

What Is Otovo's Net Debt?

As you can see below, at the end of June 2022, Otovo had kr30.3m of debt, up from kr7.39m a year ago. Click the image for more detail. But on the other hand it also has kr330.7m in cash, leading to a kr300.4m net cash position.

A Look At Otovo's Liabilities

According to the last reported balance sheet, Otovo had liabilities of kr176.5m due within 12 months, and liabilities of kr49.0m due beyond 12 months. On the other hand, it had cash of kr330.7m and kr182.3m worth of receivables due within a year. So it actually has kr287.5m more liquid assets than total liabilities.

This surplus suggests that Otovo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Otovo 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 Otovo'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 Otovo wasn't profitable at an EBIT level, but managed to grow its revenue by 159%, to kr455m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Otovo?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Otovo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr313m of cash and made a loss of kr209m. With only kr300.4m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Otovo has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Case in point: We've spotted 3 warning signs for Otovo you should be aware of, and 2 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.