Is Nanalysis Scientific (CVE:NSCI) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Nanalysis Scientific Corp. (CVE:NSCI) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Nanalysis Scientific's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Nanalysis Scientific had debt of CA$6.05m, up from CA$4.65m in one year. But on the other hand it also has CA$7.93m in cash, leading to a CA$1.88m net cash position.

How Healthy Is Nanalysis Scientific's Balance Sheet?

According to the last reported balance sheet, Nanalysis Scientific had liabilities of CA$15.7m due within 12 months, and liabilities of CA$7.54m due beyond 12 months. Offsetting this, it had CA$7.93m in cash and CA$9.48m in receivables that were due within 12 months. So its liabilities total CA$5.88m more than the combination of its cash and short-term receivables.

Of course, Nanalysis Scientific has a market capitalization of CA$73.5m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Nanalysis Scientific boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nanalysis Scientific'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.

Over 12 months, Nanalysis Scientific reported revenue of CA$23m, which is a gain of 67%, 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 Nanalysis Scientific?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Nanalysis Scientific had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$12m of cash and made a loss of CA$6.9m. However, it has net cash of CA$1.88m, so it has a bit of time before it will need more capital. Nanalysis Scientific's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Nanalysis Scientific is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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.