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.' 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. We can see that OBI Pharma, Inc. (GTSM:4174) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. 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. 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.
What Is OBI Pharma's Debt?
As you can see below, OBI Pharma had NT$46.3m of debt at September 2020, down from NT$55.3m a year prior. However, its balance sheet shows it holds NT$3.85b in cash, so it actually has NT$3.80b net cash.
A Look At OBI Pharma's Liabilities
According to the last reported balance sheet, OBI Pharma had liabilities of NT$176.7m due within 12 months, and liabilities of NT$169.8m due beyond 12 months. On the other hand, it had cash of NT$3.85b and NT$26.0m worth of receivables due within a year. So it can boast NT$3.53b more liquid assets than total liabilities.
This excess liquidity suggests that OBI Pharma is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that OBI Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since OBI Pharma will need earnings to service that debt. 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, OBI Pharma reported revenue of NT$61m, which is a gain of 7,163%, 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!
So How Risky Is OBI Pharma?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that OBI Pharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$1.3b of cash and made a loss of NT$1.5b. While this does make the company a bit risky, it's important to remember it has net cash of NT$3.80b. That means it could keep spending at its current rate for more than two years. Importantly, OBI Pharma's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Take risks, for example - OBI Pharma has 2 warning signs (and 1 which can't be ignored) we think you should know about.
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. 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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