David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Ocean Bio-Chem, Inc. (NASDAQ:OBCI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ocean Bio-Chem

What Is Ocean Bio-Chem's Debt?

The image below, which you can click on for greater detail, shows that Ocean Bio-Chem had debt of US$4.01m at the end of March 2021, a reduction from US$4.48m over a year. However, it does have US$11.2m in cash offsetting this, leading to net cash of US$7.15m.

A Look At Ocean Bio-Chem's Liabilities

Zooming in on the latest balance sheet data, we can see that Ocean Bio-Chem had liabilities of US$5.61m due within 12 months and liabilities of US$4.07m due beyond that. Offsetting this, it had US$11.2m in cash and US$11.5m in receivables that were due within 12 months. So it can boast US$13.0m more liquid assets than total liabilities.

This surplus suggests that Ocean Bio-Chem has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ocean Bio-Chem has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Ocean Bio-Chem grew its EBIT by 220% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Ocean Bio-Chem has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Ocean Bio-Chem recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.