Health Check: How Prudently Does Nanalysis Scientific (CVE:NSCI) Use Debt?

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.' 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 can see that Nanalysis Scientific Corp. (CVE:NSCI) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nanalysis Scientific

How Much Debt Does Nanalysis Scientific Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Nanalysis Scientific had debt of CA$4.65m, up from CA$3.09m in one year. However, it does have CA$12.6m in cash offsetting this, leading to net cash of CA$7.93m.

How Healthy Is Nanalysis Scientific's Balance Sheet?

According to the last reported balance sheet, Nanalysis Scientific had liabilities of CA$5.70m due within 12 months, and liabilities of CA$5.77m due beyond 12 months. Offsetting these obligations, it had cash of CA$12.6m as well as receivables valued at CA$3.94m due within 12 months. So it actually has CA$5.05m more liquid assets than total liabilities.

This surplus suggests that Nanalysis Scientific has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nanalysis Scientific 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 Nanalysis Scientific 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 Nanalysis Scientific wasn't profitable at an EBIT level, but managed to grow its revenue by 85%, to CA$14m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nanalysis Scientific?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Nanalysis Scientific 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 CA$3.2m and booked a CA$2.3m accounting loss. But at least it has CA$7.93m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Nanalysis Scientific may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger 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. Be aware that Nanalysis Scientific is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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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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.