Is Noxopharm (ASX:NOX) Using Debt Sensibly?

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, Noxopharm Limited (ASX:NOX) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Noxopharm

What Is Noxopharm's Debt?

As you can see below, Noxopharm had AU$3.95m of debt at December 2020, down from AU$7.46m a year prior. But on the other hand it also has AU$22.9m in cash, leading to a AU$18.9m net cash position.

How Strong Is Noxopharm's Balance Sheet?

According to the last reported balance sheet, Noxopharm had liabilities of AU$6.01m due within 12 months, and liabilities of AU$361.1k due beyond 12 months. Offsetting this, it had AU$22.9m in cash and AU$6.09m in receivables that were due within 12 months. So it can boast AU$22.6m more liquid assets than total liabilities.

This surplus suggests that Noxopharm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Noxopharm has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Noxopharm's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Since Noxopharm doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Noxopharm?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Noxopharm had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$12m of cash and made a loss of AU$45k. Given it only has net cash of AU$18.9m, the company may need to raise more capital if it doesn't reach break-even soon. Noxopharm's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Noxopharm you should be aware of, and 1 of them is significant.

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. 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.
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