Is Observe Medical (OB:OBSRV) Using Too Much 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 Observe Medical ASA (OB:OBSRV) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Observe Medical

What Is Observe Medical's Debt?

As you can see below, at the end of December 2023, Observe Medical had kr53.8m of debt, up from kr44.1m a year ago. Click the image for more detail. However, it does have kr13.7m in cash offsetting this, leading to net debt of about kr40.2m.

How Strong Is Observe Medical's Balance Sheet?

The latest balance sheet data shows that Observe Medical had liabilities of kr60.9m due within a year, and liabilities of kr77.0m falling due after that. Offsetting this, it had kr13.7m in cash and kr6.66m in receivables that were due within 12 months. So it has liabilities totalling kr117.6m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's kr83.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Observe Medical'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 Observe Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to kr28m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Observe Medical managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping kr51m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through kr32m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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 Observe Medical is showing 6 warning signs in our investment analysis , and 5 of those don't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com