We Think Observe Medical (OB:OBSRV) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Observe Medical ASA (OB:OBSRV) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 Observe Medical

What Is Observe Medical's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Observe Medical had debt of kr46.2m, up from kr36.5m in one year. On the flip side, it has kr14.0m in cash leading to net debt of about kr32.2m.

How Healthy Is Observe Medical's Balance Sheet?

We can see from the most recent balance sheet that Observe Medical had liabilities of kr20.4m falling due within a year, and liabilities of kr49.8m due beyond that. Offsetting these obligations, it had cash of kr14.0m as well as receivables valued at kr4.30m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr51.8m.

Of course, Observe Medical has a market capitalization of kr358.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. 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 10,502%, to kr16m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Observe Medical's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at kr29m. 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. However, it doesn't help that it burned through kr27m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Observe Medical has 3 warning signs (and 1 which is concerning) we think 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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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.
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