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.' 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. As with many other companies Ocean Bio-Chem, Inc. (NASDAQ:OBCI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Ocean Bio-Chem

How Much Debt Does Ocean Bio-Chem Carry?

The image below, which you can click on for greater detail, shows that Ocean Bio-Chem had debt of US$4.25m at the end of September 2020, a reduction from US$4.61m over a year. But on the other hand it also has US$6.58m in cash, leading to a US$2.33m net cash position.

A Look At Ocean Bio-Chem's Liabilities

The latest balance sheet data shows that Ocean Bio-Chem had liabilities of US$6.71m due within a year, and liabilities of US$4.46m falling due after that. Offsetting these obligations, it had cash of US$6.58m as well as receivables valued at US$17.4m due within 12 months. So it can boast US$12.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Ocean Bio-Chem could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ocean Bio-Chem boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Ocean Bio-Chem grew its EBIT by 227% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ocean Bio-Chem's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.