Does Otello (OB:OTEC) Have A Healthy Balance Sheet?

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.' 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 Otello Corporation ASA (OB:OTEC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Otello

What Is Otello's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Otello had debt of US$30.0m, up from US$20.0m in one year. However, it does have US$33.1m in cash offsetting this, leading to net cash of US$3.10m.

How Healthy Is Otello's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Otello had liabilities of US$90.8m due within 12 months and liabilities of US$3.00m due beyond that. On the other hand, it had cash of US$33.1m and US$67.0m worth of receivables due within a year. So it can boast US$6.30m more liquid assets than total liabilities.

Having regard to Otello's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$487.7m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Otello boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Otello can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Otello wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to US$243m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Otello?

While Otello lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$2.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Otello 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. 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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