Warren Buffett famously said, '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. As with many other companies Nanalysis Scientific Corp. (CVE:NSCI) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.
What Is Nanalysis Scientific's Debt?
As you can see below, at the end of March 2022, Nanalysis Scientific had CA$7.49m of debt, up from CA$3.96m a year ago. Click the image for more detail. However, it does have CA$19.2m in cash offsetting this, leading to net cash of CA$11.7m.
How Healthy Is Nanalysis Scientific's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nanalysis Scientific had liabilities of CA$15.0m due within 12 months and liabilities of CA$8.83m due beyond that. Offsetting these obligations, it had cash of CA$19.2m as well as receivables valued at CA$8.15m due within 12 months. So it can boast CA$3.47m more liquid assets than total liabilities.
This short term liquidity is a sign that Nanalysis Scientific could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanalysis Scientific boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nanalysis Scientific can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Nanalysis Scientific reported revenue of CA$18m, which is a gain of 90%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Nanalysis Scientific?
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 Nanalysis Scientific lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$7.4m and booked a CA$2.8m accounting loss. However, it has net cash of CA$11.7m, so it has a bit of time before it will need more capital. Nanalysis Scientific's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Nanalysis Scientific has 3 warning signs (and 1 which is concerning) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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