David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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 note that ObsEva SA (NASDAQ:OBSV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for ObsEva
How Much Debt Does ObsEva Carry?
As you can see below, at the end of March 2020, ObsEva had US$25.0m of debt, up from none a year ago. Click the image for more detail. However, it does have US$62.0m in cash offsetting this, leading to net cash of US$37.0m.
How Healthy Is ObsEva's Balance Sheet?
According to the last reported balance sheet, ObsEva had liabilities of US$23.8m due within 12 months, and liabilities of US$35.5m due beyond 12 months. Offsetting this, it had US$62.0m in cash and US$514.0k in receivables that were due within 12 months. So it actually has US$3.30m more liquid assets than total liabilities.
Having regard to ObsEva's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$193.4m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ObsEva has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ObsEva can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Given its lack of meaningful operating revenue, ObsEva shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is ObsEva?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that ObsEva had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$96m and booked a US$105m accounting loss. With only US$37.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Take risks, for example - ObsEva has 5 warning signs (and 2 which shouldn't be ignored) we think 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. 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. Thank you for reading.