Observe Medical (OB:OBSRV) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Observe Medical ASA (OB:OBSRV) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Observe Medical

What Is Observe Medical's Debt?

The image below, which you can click on for greater detail, shows that Observe Medical had debt of kr43.6m at the end of June 2022, a reduction from kr46.2m over a year. On the flip side, it has kr40.5m in cash leading to net debt of about kr3.08m.

A Look At Observe Medical's Liabilities

Zooming in on the latest balance sheet data, we can see that Observe Medical had liabilities of kr21.1m due within 12 months and liabilities of kr46.5m due beyond that. On the other hand, it had cash of kr40.5m and kr2.49m worth of receivables due within a year. So it has liabilities totalling kr24.6m more than its cash and near-term receivables, combined.

Given Observe Medical has a market capitalization of kr150.8m, 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. 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.

In the last year Observe Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to kr23m. With any luck the company will be able to grow its way to profitability.

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. Indeed, it lost a very considerable kr38m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr42m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Observe Medical is showing 6 warning signs in our investment analysis , and 4 of those are significant...

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.