Is Ontrak (NASDAQ:OTRK) Using Too Much Debt?

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. As with many other companies Ontrak, Inc. (NASDAQ:OTRK) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ontrak

What Is Ontrak's Net Debt?

As you can see below, Ontrak had US$46.4m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$75.3m in cash to offset that, meaning it has US$29.0m net cash.

How Strong Is Ontrak's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ontrak had liabilities of US$15.9m due within 12 months and liabilities of US$47.6m due beyond that. Offsetting these obligations, it had cash of US$75.3m as well as receivables valued at US$10.5m due within 12 months. So it actually has US$22.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Ontrak's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Ontrak 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 it is future earnings, more than anything, that will determine Ontrak's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ontrak reported revenue of US$103m, which is a gain of 58%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Ontrak?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ontrak lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$16m and booked a US$29m accounting loss. Given it only has net cash of US$29.0m, the company may need to raise more capital if it doesn't reach break-even soon. Ontrak's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Ontrak has 4 warning signs we think you should be aware of.

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.