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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Ocean Bio-Chem, Inc. (NASDAQ:OBCI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ocean Bio-Chem

How Much Debt Does Ocean Bio-Chem Carry?

As you can see below, at the end of March 2022, Ocean Bio-Chem had US$8.19m of debt, up from US$4.01m a year ago. Click the image for more detail. However, it does have US$10.2m in cash offsetting this, leading to net cash of US$2.03m.

How Healthy Is Ocean Bio-Chem's Balance Sheet?

The latest balance sheet data shows that Ocean Bio-Chem had liabilities of US$5.54m due within a year, and liabilities of US$8.04m falling due after that. On the other hand, it had cash of US$10.2m and US$11.1m worth of receivables due within a year. So it actually has US$7.75m 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.

The modesty of its debt load may become crucial for Ocean Bio-Chem if management cannot prevent a repeat of the 28% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.