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Is Nanalysis Scientific (CVE:NSCI) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Nanalysis Scientific Corp. (CVE:NSCI) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nanalysis Scientific

How Much Debt Does Nanalysis Scientific Carry?

As you can see below, at the end of September 2021, Nanalysis Scientific had CA$4.65m of debt, up from CA$3.09m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$12.6m in cash, so it actually has CA$7.93m net cash.


A Look At Nanalysis Scientific's Liabilities

According to the last reported balance sheet, Nanalysis Scientific had liabilities of CA$5.70m due within 12 months, and liabilities of CA$5.77m due beyond 12 months. On the other hand, it had cash of CA$12.6m and CA$3.94m worth of receivables due within a year. So it actually has CA$5.05m more liquid assets than total liabilities.

This surplus suggests that Nanalysis Scientific has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanalysis Scientific boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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$14m, which is a gain of 85%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nanalysis Scientific?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Nanalysis Scientific had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$3.2m of cash and made a loss of CA$2.3m. However, it has net cash of CA$7.93m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Nanalysis Scientific may be on a path to profitability. 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. To that end, you should learn about the 4 warning signs we've spotted with Nanalysis Scientific (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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