Is Oblong (NASDAQ:OBLG) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Oblong Inc. (NASDAQ:OBLG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Oblong

What Is Oblong's Net Debt?

The image below, which you can click on for greater detail, shows that Oblong had debt of US$2.42m at the end of June 2021, a reduction from US$7.97m over a year. However, it does have US$13.0m in cash offsetting this, leading to net cash of US$10.6m.

A Look At Oblong's Liabilities

The latest balance sheet data shows that Oblong had liabilities of US$3.57m due within a year, and liabilities of US$3.07m falling due after that. Offsetting this, it had US$13.0m in cash and US$953.0k in receivables that were due within 12 months. So it actually has US$7.35m more liquid assets than total liabilities.

This short term liquidity is a sign that Oblong could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Oblong has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Oblong will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Oblong had a loss before interest and tax, and actually shrunk its revenue by 30%, to US$11m. To be frank that doesn't bode well.

So How Risky Is Oblong?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Oblong had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$7.4m of cash and made a loss of US$8.1m. But at least it has US$10.6m on the balance sheet to spend on growth, near-term. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Oblong (1 is concerning!) that you should be aware of before investing here.

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.

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.

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