Yahoo Finance ObsEva (NASDAQ:OBSV) Has Debt But No Earnings; Should You Worry?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that ObsEva SA (NASDAQ:OBSV) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for ObsEva
How Much Debt Does ObsEva Carry?
The chart below, which you can click on for greater detail, shows that ObsEva had US$25.6m in debt in September 2021; about the same as the year before. But on the other hand it also has US$62.9m in cash, leading to a US$37.3m net cash position.
How Strong Is ObsEva's Balance Sheet?
The latest balance sheet data shows that ObsEva had liabilities of US$18.8m due within a year, and liabilities of US$34.7m falling due after that. Offsetting these obligations, it had cash of US$62.9m as well as receivables valued at US$3.43m due within 12 months. So it can boast US$12.8m more liquid assets than total liabilities.
This surplus suggests that ObsEva has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ObsEva boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ObsEva 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.
Given its lack of meaningful operating revenue, ObsEva shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is ObsEva?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ObsEva lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$57m of cash and made a loss of US$57m. Given it only has net cash of US$37.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for ObsEva you should be aware of, and 1 of them is a bit unpleasant.
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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
