Noxopharm (ASX:NOX) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Noxopharm Limited (ASX:NOX) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Noxopharm had AU$3.75m of debt in December 2020, down from AU$7.46m, one year before. However, it does have AU$22.9m in cash offsetting this, leading to net cash of AU$19.1m.

A Look At Noxopharm's Liabilities

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. On the other hand, it had cash of AU$22.9m and AU$6.09m worth of receivables due within a year. 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 you can't view debt in total isolation; since Noxopharm will need earnings to service that debt. 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 we do note that Noxopharm had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$12m and booked a AU$45k accounting loss. Given it only has net cash of AU$19.1m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Noxopharm's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 instance, we've identified 2 warning signs for Noxopharm (1 shouldn't be ignored) you should be aware of.

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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