Is Oyster Point Pharma (NASDAQ:OYST) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Oyster Point Pharma, Inc. (NASDAQ:OYST) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Oyster Point Pharma

What Is Oyster Point Pharma's Debt?

As you can see below, at the end of June 2022, Oyster Point Pharma had US$91.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$104.9m in cash, so it actually has US$13.4m net cash.

How Healthy Is Oyster Point Pharma's Balance Sheet?

We can see from the most recent balance sheet that Oyster Point Pharma had liabilities of US$31.1m falling due within a year, and liabilities of US$102.0m due beyond that. Offsetting this, it had US$104.9m in cash and US$10.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$17.4m.

Of course, Oyster Point Pharma has a market capitalization of US$310.4m, so these liabilities are probably manageable. 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, Oyster Point Pharma 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 Oyster Point Pharma'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.

While it hasn't made a profit, at least Oyster Point Pharma booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Oyster Point Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Oyster Point Pharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$142m of cash and made a loss of US$158m. But the saving grace is the US$13.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 4 warning signs we've spotted with Oyster Point Pharma .

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.