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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Nixu Oyj (HEL:NIXU) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Nixu Oyj
What Is Nixu Oyj’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that Nixu Oyj had €7.22m of debt in December 2018, down from €8.52m, one year before But it also has €9.29m in cash to offset that, meaning it has €2.07m net cash.
A Look At Nixu Oyj’s Liabilities
According to the last reported balance sheet, Nixu Oyj had liabilities of €16.0m due within 12 months, and liabilities of €516.0k due beyond 12 months. Offsetting these obligations, it had cash of €9.29m as well as receivables valued at €11.6m due within 12 months. So it actually has €4.37m more liquid assets than total liabilities.
This surplus suggests that Nixu Oyj has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Given that Nixu Oyj has more cash than debt, we’re pretty confident it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nixu Oyj’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Nixu Oyj managed to grow its revenue by 24%, to €40m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Nixu Oyj?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Nixu Oyj had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through €839k of cash and made a loss of €2.0m. While this does make the company a bit risky, it’s important to remember it has net cash of €9.3m. That means it could keep spending at its current rate for more than five years. With very solid revenue growth in the last year, Nixu Oyj may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Nixu Oyj’s profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.