Is OncoCyte (NASDAQ:OCX) Using Debt Sensibly?

Simply Wall St
January 25, 2022
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that OncoCyte Corporation (NASDAQ:OCX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for OncoCyte

How Much Debt Does OncoCyte Carry?

As you can see below, OncoCyte had US$1.68m of debt at September 2021, down from US$4.13m a year prior. But on the other hand it also has US$44.3m in cash, leading to a US$42.6m net cash position.

NasdaqGM:OCX Debt to Equity History January 25th 2022

How Healthy Is OncoCyte's Balance Sheet?

We can see from the most recent balance sheet that OncoCyte had liabilities of US$13.4m falling due within a year, and liabilities of US$55.6m due beyond that. Offsetting these obligations, it had cash of US$44.3m as well as receivables valued at US$1.03m due within 12 months. So it has liabilities totalling US$23.7m more than its cash and near-term receivables, combined.

Given OncoCyte has a market capitalization of US$166.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, OncoCyte boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OncoCyte 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.

Over 12 months, OncoCyte reported revenue of US$4.6m, which is a gain of 551%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is OncoCyte?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that OncoCyte had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$37m of cash and made a loss of US$35m. Given it only has net cash of US$42.6m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, OncoCyte's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with OncoCyte .

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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