Warren Buffett famously said, '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 Observe Medical ASA (OB:OBSRV) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
See our latest analysis for Observe Medical
What Is Observe Medical's Debt?
As you can see below, at the end of December 2020, Observe Medical had kr34.8m of debt, up from kr25.4m a year ago. Click the image for more detail. However, it also had kr18.9m in cash, and so its net debt is kr15.9m.
A Look At Observe Medical's Liabilities
According to the last reported balance sheet, Observe Medical had liabilities of kr9.93m due within 12 months, and liabilities of kr57.4m due beyond 12 months. On the other hand, it had cash of kr18.9m and kr3.19m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr45.2m.
Given Observe Medical has a market capitalization of kr503.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Observe Medical reported revenue of kr3.0m, which is a gain of 1,576%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Caveat Emptor
Importantly, Observe Medical had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr28m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr23m of cash over the last year. So to be blunt we think it is 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 Observe Medical (of which 2 are significant!) you should know about.
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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About OB:OBSRV
Observe Medical
Engages in developing and commercializing medical technology products for patients, healthcare professionals, and hospitals in Norway, Sweden, the United States, and rest of European countries.
Moderate with adequate balance sheet.
