Is Omega Therapeutics (NASDAQ:OMGA) Weighed On By Its Debt Load?

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, Omega Therapeutics, Inc. (NASDAQ:OMGA) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Omega Therapeutics

What Is Omega Therapeutics's Debt?

As you can see below, Omega Therapeutics had US$19.9m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$89.3m in cash to offset that, meaning it has US$69.4m net cash.

How Healthy Is Omega Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Omega Therapeutics had liabilities of US$26.8m falling due within a year, and liabilities of US$114.9m due beyond that. Offsetting this, it had US$89.3m in cash and US$1.43m in receivables that were due within 12 months. So its liabilities total US$51.0m more than the combination of its cash and short-term receivables.

Omega Therapeutics has a market capitalization of US$219.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Omega Therapeutics 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 Omega Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Omega Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 92%, to US$2.8m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Omega Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Omega Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$101m of cash and made a loss of US$108m. Given it only has net cash of US$69.4m, the company may need to raise more capital if it doesn't reach break-even soon. Omega Therapeutics'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Omega Therapeutics has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.