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 seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies Oblong Inc. (NASDAQ:OBLG) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Oblong’s Net Debt?
As you can see below, Oblong had US$2.42m of debt at March 2021, down from US$5.54m a year prior. But it also has US$3.96m in cash to offset that, meaning it has US$1.55m net cash.
A Look At Oblong’s Liabilities
The latest balance sheet data shows that Oblong had liabilities of US$6.76m due within a year, and liabilities of US$984.0k falling due after that. On the other hand, it had cash of US$3.96m and US$1.78m worth of receivables due within a year. So its liabilities total US$2.00m more than the combination of its cash and short-term receivables.
Given Oblong has a market capitalization of US$74.7m, it’s hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Oblong also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can’t view debt in total isolation; since Oblong will need earnings to service that debt.
Over 12 months, Oblong made a loss at the EBIT level, and saw its revenue drop to US$12m, which is a fall of 23%. That makes us nervous, to say the least.
So How Risky Is Oblong?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Oblong had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$5.3m of cash and made a loss of US$9.2m. But at least it has US$1.55m on the balance sheet to spend on growth, near-term. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet.