Ossia International (SGX:O08) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Ossia International Limited (SGX:O08) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Ossia International

What Is Ossia International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Ossia International had S$3.74m of debt, an increase on S$2.98m, over one year. But it also has S$7.95m in cash to offset that, meaning it has S$4.21m net cash.

A Look At Ossia International's Liabilities

According to the last reported balance sheet, Ossia International had liabilities of S$7.70m due within 12 months, and liabilities of S$511.0k due beyond 12 months. Offsetting this, it had S$7.95m in cash and S$3.35m in receivables that were due within 12 months. So it actually has S$3.10m more liquid assets than total liabilities.

This surplus suggests that Ossia International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ossia International has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Ossia International grew its EBIT by 18% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ossia International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ossia International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Ossia International recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ossia International has S$4.21m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$2.1m, being 78% of its EBIT. So we don't think Ossia International's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ossia International is showing 3 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.