Yahoo Finance Is Nanoco Group (LON:NANO) Using Too Much Debt?
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. As with many other companies Nanoco Group plc (LON:NANO) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Nanoco Group
What Is Nanoco Group's Net Debt?
As you can see below, at the end of July 2021, Nanoco Group had UK£3.49m of debt, up from UK£462.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds UK£3.81m in cash, so it actually has UK£326.0k net cash.
A Look At Nanoco Group's Liabilities
We can see from the most recent balance sheet that Nanoco Group had liabilities of UK£2.42m falling due within a year, and liabilities of UK£3.77m due beyond that. Offsetting these obligations, it had cash of UK£3.81m as well as receivables valued at UK£1.70m due within 12 months. So it has liabilities totalling UK£667.0k more than its cash and near-term receivables, combined.
Having regard to Nanoco Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the UK£58.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Nanoco Group also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Nanoco Group 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.
In the last year Nanoco Group had a loss before interest and tax, and actually shrunk its revenue by 46%, to UK£2.1m. To be frank that doesn't bode well.
So How Risky Is Nanoco Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nanoco Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£3.8m and booked a UK£4.4m accounting loss. But the saving grace is the UK£326.0k on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nanoco Group is showing 5 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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.
