Health Check: How Prudently Does Neptune Wellness Solutions (TSE:NEPT) 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.' 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 note that Neptune Wellness Solutions Inc. (TSE:NEPT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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.

Check out our latest analysis for Neptune Wellness Solutions

What Is Neptune Wellness Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Neptune Wellness Solutions had debt of CA$3.23m, up from none in one year. However, its balance sheet shows it holds CA$9.11m in cash, so it actually has CA$5.88m net cash.

How Strong Is Neptune Wellness Solutions's Balance Sheet?

According to the last reported balance sheet, Neptune Wellness Solutions had liabilities of CA$21.7m due within 12 months, and liabilities of CA$5.68m due beyond 12 months. Offsetting these obligations, it had cash of CA$9.11m as well as receivables valued at CA$22.4m due within 12 months. So it can boast CA$4.12m more liquid assets than total liabilities.

This state of affairs indicates that Neptune Wellness Solutions's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CA$253.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Neptune Wellness Solutions has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Neptune Wellness Solutions'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 Neptune Wellness Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 154%, to CA$59m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Neptune Wellness Solutions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Neptune Wellness Solutions had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$71m of cash and made a loss of CA$67m. With only CA$5.88m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Neptune Wellness Solutions's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Neptune Wellness Solutions (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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