Is NanoXplore (TSE:GRA) A Risky Investment?

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. As with many other companies NanoXplore Inc. (TSE:GRA) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for NanoXplore

How Much Debt Does NanoXplore Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 NanoXplore had CA$14.9m of debt, an increase on CA$11.7m, over one year. However, it does have CA$42.8m in cash offsetting this, leading to net cash of CA$27.9m.

How Healthy Is NanoXplore's Balance Sheet?

The latest balance sheet data shows that NanoXplore had liabilities of CA$32.4m due within a year, and liabilities of CA$19.3m falling due after that. Offsetting this, it had CA$42.8m in cash and CA$22.4m in receivables that were due within 12 months. So it can boast CA$13.4m more liquid assets than total liabilities.

This short term liquidity is a sign that NanoXplore could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NanoXplore has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NanoXplore'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 NanoXplore wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to CA$103m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NanoXplore?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NanoXplore had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$23m of cash and made a loss of CA$17m. Given it only has net cash of CA$27.9m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, NanoXplore may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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. Case in point: We've spotted 1 warning sign for NanoXplore you should be aware of.

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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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.