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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Ouster, Inc. (NYSE:OUST) does use debt in its business. But is this debt a concern to shareholders?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ouster's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Ouster had debt of US$44.0m, up from US$40.1m in one year. But it also has US$184.2m in cash to offset that, meaning it has US$140.3m net cash.

How Strong Is Ouster's Balance Sheet?

We can see from the most recent balance sheet that Ouster had liabilities of US$74.1m falling due within a year, and liabilities of US$65.2m due beyond that. Offsetting these obligations, it had cash of US$184.2m as well as receivables valued at US$14.3m due within 12 months. So it can boast US$59.3m more liquid assets than total liabilities.

This surplus suggests that Ouster has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ouster has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ouster can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Ouster reported revenue of US$100m, which is a gain of 69%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Ouster?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Ouster 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$82m and booked a US$122m accounting loss. However, it has net cash of US$140.3m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Ouster may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 3 warning signs for Ouster that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.