Is Neovasc (TSE:NVCN) Using Too Much Debt?

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.' 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. We note that Neovasc Inc. (TSE:NVCN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

Check out our latest analysis for Neovasc

What Is Neovasc's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Neovasc had debt of US$12.2m, up from US$8.40m in one year. However, its balance sheet shows it holds US$31.3m in cash, so it actually has US$19.1m net cash.

How Strong Is Neovasc's Balance Sheet?

According to the last reported balance sheet, Neovasc had liabilities of US$4.10m due within 12 months, and liabilities of US$12.4m due beyond 12 months. Offsetting these obligations, it had cash of US$31.3m as well as receivables valued at US$1.69m due within 12 months. So it actually has US$16.4m more liquid assets than total liabilities.

This luscious liquidity implies that Neovasc's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Neovasc 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 ultimately the future profitability of the business will decide if Neovasc can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Neovasc reported revenue of US$3.1m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Neovasc?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Neovasc had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$24m of cash and made a loss of US$34m. With only US$19.1m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Neovasc may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Neovasc has 4 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.