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 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. 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?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NanoXplore

How Much Debt Does NanoXplore Carry?

As you can see below, NanoXplore had CA$13.2m of debt at March 2022, down from CA$15.2m a year prior. But on the other hand it also has CA$56.1m in cash, leading to a CA$42.9m net cash position.

How Strong Is NanoXplore's Balance Sheet?

According to the last reported balance sheet, NanoXplore had liabilities of CA$26.8m due within 12 months, and liabilities of CA$21.8m due beyond 12 months. On the other hand, it had cash of CA$56.1m and CA$19.1m worth of receivables due within a year. So it actually has CA$26.6m 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 ultimately the future profitability of the business will decide if NanoXplore can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year NanoXplore wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to CA$85m. With any luck the company will be able to grow its way to profitability.

So How Risky Is NanoXplore?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NanoXplore had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$24m of cash and made a loss of CA$17m. With only CA$42.9m on the balance sheet, it would appear that its going to need to raise capital again 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. Be aware that NanoXplore is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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. 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.