Is Outlook Therapeutics (NASDAQ:OTLK) Using Debt In A Risky Way?

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 can see that Outlook Therapeutics, Inc. (NASDAQ:OTLK) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Outlook Therapeutics

What Is Outlook Therapeutics's Debt?

As you can see below, Outlook Therapeutics had US$10.5m of debt at June 2022, down from US$11.5m a year prior. But on the other hand it also has US$26.0m in cash, leading to a US$15.6m net cash position.

How Strong Is Outlook Therapeutics' Balance Sheet?

The latest balance sheet data shows that Outlook Therapeutics had liabilities of US$18.4m due within a year, and liabilities of US$75.7k falling due after that. Offsetting this, it had US$26.0m in cash and US$100.0k in receivables that were due within 12 months. So it can boast US$7.62m more liquid assets than total liabilities.

This short term liquidity is a sign that Outlook Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Outlook Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Outlook Therapeutics'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.

Given its lack of meaningful operating revenue, Outlook Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Outlook Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Outlook Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$55m and booked a US$65m accounting loss. Given it only has net cash of US$15.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Outlook Therapeutics (of which 2 are a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.