Health Check: How Prudently Does Neptune Wellness Solutions (TSE:NEPT) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Neptune Wellness Solutions Inc. (TSE:NEPT) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Neptune Wellness Solutions

What Is Neptune Wellness Solutions's Net Debt?

As you can see below, at the end of December 2021, Neptune Wellness Solutions had CA$14.4m of debt, up from CA$3.25m a year ago. Click the image for more detail. But it also has CA$16.7m in cash to offset that, meaning it has CA$2.23m net cash.

A Look At Neptune Wellness Solutions' Liabilities

According to the last reported balance sheet, Neptune Wellness Solutions had liabilities of CA$32.8m due within 12 months, and liabilities of CA$18.1m due beyond 12 months. Offsetting this, it had CA$16.7m in cash and CA$11.6m in receivables that were due within 12 months. So its liabilities total CA$22.6m more than the combination of its cash and short-term receivables.

Given Neptune Wellness Solutions has a market capitalization of CA$970.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Neptune Wellness Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Neptune Wellness Solutions can strengthen its balance sheet over time. 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 7.6%, to CA$53m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$111m. Given it only has net cash of CA$2.23m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Neptune Wellness Solutions (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.