These 4 Measures Indicate That Noxopharm (ASX:NOX) Is Using Debt Extensively

Warren Buffett famously said, '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. Importantly, Noxopharm Limited (ASX:NOX) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Noxopharm

What Is Noxopharm's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Noxopharm had AU$5.00m of debt, an increase on AU$3.93m, over one year. However, its balance sheet shows it holds AU$7.10m in cash, so it actually has AU$2.10m net cash.

How Strong Is Noxopharm's Balance Sheet?

We can see from the most recent balance sheet that Noxopharm had liabilities of AU$6.69m falling due within a year, and liabilities of AU$508.8k due beyond that. On the other hand, it had cash of AU$7.10m and AU$4.65m worth of receivables due within a year. So it actually has AU$4.55m more liquid assets than total liabilities.

This short term liquidity is a sign that Noxopharm could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Noxopharm has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Noxopharm improved its EBIT from a last year's loss to a positive AU$3.6m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Noxopharm will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Noxopharm may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Noxopharm burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Noxopharm has net cash of AU$2.10m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Noxopharm's balance sheet. 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. For example, we've discovered 6 warning signs for Noxopharm (3 are a bit unpleasant!) that you should be aware of before investing here.

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.

If you’re looking to trade Noxopharm, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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