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Neovasc (TSE:NVCN) Has Debt But No Earnings; Should You Worry?

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.' 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, Neovasc Inc. (TSE:NVCN) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Neovasc

How Much Debt Does Neovasc Carry?

As you can see below, Neovasc had US$8.97m of debt at March 2021, down from US$10.2m a year prior. However, it does have US$70.5m in cash offsetting this, leading to net cash of US$61.5m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Neovasc's Liabilities

According to the last reported balance sheet, Neovasc had liabilities of US$5.69m due within 12 months, and liabilities of US$12.6m due beyond 12 months. Offsetting this, it had US$70.5m in cash and US$1.17m in receivables that were due within 12 months. So it actually has US$53.4m more liquid assets than total liabilities.

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This surplus liquidity suggests that Neovasc's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Neovasc boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Neovasc's ability to maintain a healthy balance sheet going forward. 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 Neovasc had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to US$1.9m. We would much prefer see growth.

So How Risky Is Neovasc?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Neovasc had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$32m and booked a US$27m accounting loss. Given it only has net cash of US$61.5m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 5 warning signs for Neovasc you should be aware of, and 1 of them doesn't sit too well with us.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.