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. We can see that NanoString Technologies, Inc. (NASDAQ:NSTG) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is NanoString Technologies's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 NanoString Technologies had debt of US$79.2m, up from US$50.1 in one year. But it also has US$128.9m in cash to offset that, meaning it has US$49.7m net cash.
How Strong Is NanoString Technologies's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NanoString Technologies had liabilities of US$37.7m due within 12 months and liabilities of US$110.5m due beyond that. Offsetting these obligations, it had cash of US$128.9m as well as receivables valued at US$19.5m due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that NanoString Technologies's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.10b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that NanoString Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NanoString Technologies 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 NanoString Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 6.0%, to US$119m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is NanoString Technologies?
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 NanoString Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$88m and booked a US$86m accounting loss. But at least it has US$49.7m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for NanoString Technologies that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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