Is Ocular Therapeutix (NASDAQ:OCUL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Ocular Therapeutix, Inc. (NASDAQ:OCUL) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its 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 June 2023 Ocular Therapeutix had US$55.4m of debt, an increase on US$52.7m, over one year. But on the other hand it also has US$66.6m in cash, leading to a US$11.2m net cash position.

A Look At Ocular Therapeutix's Liabilities

The latest balance sheet data shows that Ocular Therapeutix had liabilities of US$32.4m due within a year, and liabilities of US$87.1m falling due after that. Offsetting these obligations, it had cash of US$66.6m as well as receivables valued at US$27.3m due within 12 months. So its liabilities total US$25.6m more than the combination of its cash and short-term receivables.

Of course, Ocular Therapeutix has a market capitalization of US$197.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ocular Therapeutix also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ocular Therapeutix 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.

In the last year Ocular Therapeutix wasn't profitable at an EBIT level, but managed to grow its revenue by 9.4%, to US$55m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Ocular Therapeutix?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Ocular Therapeutix lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$78m and booked a US$91m accounting loss. With only US$11.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 3 warning signs for Ocular Therapeutix you should be aware of, and 1 of them is significant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.