Is Neovasc (TSE:NVCN) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Neovasc Inc. (TSE:NVCN) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Neovasc

What Is Neovasc's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Neovasc had US$8.97m of debt in March 2021, down from US$10.2m, one year before. But on the other hand it also has US$70.5m in cash, leading to a US$61.5m net cash position.

A Look At Neovasc's Liabilities

Zooming in on the latest balance sheet data, we can see that Neovasc had liabilities of US$5.69m due within 12 months and liabilities of US$12.6m due beyond that. Offsetting these obligations, it had cash of US$70.5m as well as receivables valued at US$1.17m due within 12 months. So it actually has US$53.4m more liquid assets than total liabilities.

This surplus strongly suggests that Neovasc has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Neovasc has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Neovasc can strengthen its balance sheet over time. 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. That's not what we would hope to see.

So How Risky Is Neovasc?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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. With only US$61.5m on the balance sheet, it would appear that its going to need to raise capital again 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Neovasc (including 1 which 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.

If you’re looking to trade a wide range of investments, 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 (at) simplywallst.com.