Is Ocular Therapeutix (NASDAQ:OCUL) Using Debt In A Risky Way?

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.' 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. Importantly, Ocular Therapeutix, Inc. (NASDAQ:OCUL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ocular Therapeutix

What Is Ocular Therapeutix's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Ocular Therapeutix had US$53.3m of debt, an increase on US$50.8m, over one year. However, its balance sheet shows it holds US$121.0m in cash, so it actually has US$67.6m net cash.

How Strong Is Ocular Therapeutix's Balance Sheet?

The latest balance sheet data shows that Ocular Therapeutix had liabilities of US$29.3m due within a year, and liabilities of US$83.1m falling due after that. On the other hand, it had cash of US$121.0m and US$19.8m worth of receivables due within a year. So it actually has US$28.4m more liquid assets than total liabilities.

This surplus suggests that Ocular Therapeutix has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Ocular Therapeutix boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Ocular Therapeutix's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Ocular Therapeutix reported revenue of US$50m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Ocular Therapeutix?

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 Ocular Therapeutix had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$60m and booked a US$59m accounting loss. Given it only has net cash of US$67.6m, the company may need to raise more capital if it doesn't reach break-even soon. Ocular Therapeutix'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. We've identified 1 warning sign with Ocular Therapeutix , and understanding them should be part of your investment process.

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.