Despite Lacking Profits Ocular Therapeutix (NASDAQ:OCUL) Seems To Be On Top Of Its 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Ocular Therapeutix, Inc. (NASDAQ:OCUL) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ocular Therapeutix

How Much Debt Does Ocular Therapeutix Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Ocular Therapeutix had debt of US$52.7m, up from US$50.2m in one year. But on the other hand it also has US$134.5m in cash, leading to a US$81.8m net cash position.

How Healthy Is Ocular Therapeutix's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ocular Therapeutix had liabilities of US$26.1m due within 12 months and liabilities of US$81.2m due beyond that. Offsetting this, it had US$134.5m in cash and US$20.5m in receivables that were due within 12 months. So it actually has US$47.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Ocular Therapeutix could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ocular Therapeutix 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 Ocular Therapeutix 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 Ocular Therapeutix wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to US$50m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Ocular Therapeutix?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Ocular Therapeutix had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$59m and booked a US$33m accounting loss. Given it only has net cash of US$81.8m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Ocular Therapeutix may be on a path to profitability. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Ocular Therapeutix that you should be aware of before investing here.

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. 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.