David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, OptiNose, Inc. (NASDAQ:OPTN) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.
How Much Debt Does OptiNose Carry?
As you can see below, at the end of June 2020, OptiNose had US$104.9m of debt, up from US$72.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$125.3m in cash, so it actually has US$20.3m net cash.
How Healthy Is OptiNose's Balance Sheet?
According to the last reported balance sheet, OptiNose had liabilities of US$34.9m due within 12 months, and liabilities of US$105.5m due beyond 12 months. Offsetting these obligations, it had cash of US$125.3m as well as receivables valued at US$14.1m due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that OptiNose's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$304.9m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, OptiNose 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 OptiNose 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.
Over 12 months, OptiNose reported revenue of US$41m, which is a gain of 152%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is OptiNose?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months OptiNose lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$85.2m and booked a US$108.5m accounting loss. However, it has net cash of US$20.3m, so it has a bit of time before it will need more capital. The good news for shareholders is that OptiNose has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Be aware that OptiNose is showing 2 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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