The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Ocean Bio-Chem, Inc. (NASDAQ:OBCI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 at September 2021 Ocean Bio-Chem had debt of US$8.64m, up from US$4.25m in one year. However, it does have US$10.7m in cash offsetting this, leading to net cash of US$2.04m.

A Look At Ocean Bio-Chem's Liabilities

According to the last reported balance sheet, Ocean Bio-Chem had liabilities of US$7.73m due within 12 months, and liabilities of US$8.51m due beyond 12 months. On the other hand, it had cash of US$10.7m and US$17.9m worth of receivables due within a year. So it actually has US$12.3m 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. 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.

On the other hand, Ocean Bio-Chem saw its EBIT drop by 7.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ocean Bio-Chem will need earnings to service that debt. 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.