NanoXplore (TSE:GRA) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, NanoXplore Inc. (TSE:GRA) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NanoXplore

How Much Debt Does NanoXplore Carry?

As you can see below, NanoXplore had CA$10.9m of debt at December 2021, down from CA$17.3m a year prior. But on the other hand it also has CA$31.2m in cash, leading to a CA$20.3m net cash position.

A Look At NanoXplore's Liabilities

Zooming in on the latest balance sheet data, we can see that NanoXplore had liabilities of CA$24.2m due within 12 months and liabilities of CA$22.4m due beyond that. On the other hand, it had cash of CA$31.2m and CA$19.4m worth of receivables due within a year. So it actually has CA$3.93m more liquid assets than total liabilities.

Having regard to NanoXplore's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$704.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Over 12 months, NanoXplore reported revenue of CA$74m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NanoXplore?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that NanoXplore had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$23m and booked a CA$17m accounting loss. Given it only has net cash of CA$20.3m, 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. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with NanoXplore (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.