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.' 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. Importantly, Nova Leap Health Corp. (CVE:NLH) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. 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.
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What Is Nova Leap Health's Net Debt?
The chart below, which you can click on for greater detail, shows that Nova Leap Health had US$2.96m in debt in September 2022; about the same as the year before. However, it also had US$2.21m in cash, and so its net debt is US$753.7k.
How Healthy Is Nova Leap Health's Balance Sheet?
The latest balance sheet data shows that Nova Leap Health had liabilities of US$4.32m due within a year, and liabilities of US$1.71m falling due after that. Offsetting this, it had US$2.21m in cash and US$2.70m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.13m.
Given Nova Leap Health has a market capitalization of US$17.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nova Leap Health's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Nova Leap Health wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to US$27m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Nova Leap Health still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$1.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$592k. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Nova Leap Health .
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. 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.
About TSXV:NLH
Nova Leap Health
Provides home and home health care services in the United States and Canada.
Flawless balance sheet and fair value.