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.' 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. Importantly, Ocular Therapeutix, Inc. (NASDAQ:OCUL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Ocular Therapeutix's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ocular Therapeutix had US$67.1m of debt, an increase on US$55.4m, over one year. However, its balance sheet shows it holds US$459.7m in cash, so it actually has US$392.6m net cash.

How Healthy Is Ocular Therapeutix's Balance Sheet?

According to the last reported balance sheet, Ocular Therapeutix had liabilities of US$30.0m due within 12 months, and liabilities of US$109.4m due beyond 12 months. Offsetting these obligations, it had cash of US$459.7m as well as receivables valued at US$30.2m due within 12 months. So it actually has US$350.5m more liquid assets than total liabilities.

It's good to see that Ocular Therapeutix has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Ocular Therapeutix 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 it is future earnings, more than anything, that will determine Ocular Therapeutix's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ocular Therapeutix reported revenue of US$61m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Ocular Therapeutix?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Ocular Therapeutix lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$91m and booked a US$138m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$392.6m. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Ocular Therapeutix (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.