Is Outlook Therapeutics (NASDAQ:OTLK) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Outlook Therapeutics, Inc. (NASDAQ:OTLK) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Outlook Therapeutics

How Much Debt Does Outlook Therapeutics Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Outlook Therapeutics had US$22.8m of debt, an increase on US$11.3m, over one year. However, its balance sheet shows it holds US$58.4m in cash, so it actually has US$35.6m net cash.

How Healthy Is Outlook Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Outlook Therapeutics had liabilities of US$31.4m due within 12 months and liabilities of US$312.3k due beyond that. Offsetting these obligations, it had cash of US$58.4m as well as receivables valued at US$100.0k due within 12 months. So it actually has US$26.8m 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. Succinctly put, Outlook Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Outlook Therapeutics 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.

Since Outlook Therapeutics doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

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$60m accounting loss. Given it only has net cash of US$35.6m, 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. 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. Case in point: We've spotted 4 warning signs for Outlook Therapeutics you should be aware of, and 2 of them are potentially serious.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.