Nanalysis Scientific (CVE:NSCI) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Nanalysis Scientific Corp. (CVE:NSCI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanalysis Scientific

What Is Nanalysis Scientific's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Nanalysis Scientific had debt of CA$3.09m, up from CA$973.0k in one year. However, it does have CA$4.47m in cash offsetting this, leading to net cash of CA$1.38m.

A Look At Nanalysis Scientific's Liabilities

According to the last reported balance sheet, Nanalysis Scientific had liabilities of CA$5.65m due within 12 months, and liabilities of CA$3.53m due beyond 12 months. Offsetting this, it had CA$4.47m in cash and CA$2.66m in receivables that were due within 12 months. So it has liabilities totalling CA$2.05m more than its cash and near-term receivables, combined.

Given Nanalysis Scientific has a market capitalization of CA$29.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Nanalysis Scientific also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nanalysis Scientific will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Nanalysis Scientific had a loss before interest and tax, and actually shrunk its revenue by 19%, to CA$7.3m. We would much prefer see growth.

So How Risky Is Nanalysis Scientific?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nanalysis Scientific lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$2.0m of cash and made a loss of CA$2.5m. However, it has net cash of CA$1.38m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Nanalysis Scientific (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

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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.
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