Does Neo Performance Materials (TSE:NEO) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Neo Performance Materials Inc. (TSE:NEO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Neo Performance Materials's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Neo Performance Materials had US$71.1m of debt, an increase on US$49.4m, over one year. But it also has US$77.3m in cash to offset that, meaning it has US$6.18m net cash.

A Look At Neo Performance Materials' Liabilities

According to the last reported balance sheet, Neo Performance Materials had liabilities of US$130.2m due within 12 months, and liabilities of US$86.7m due beyond 12 months. Offsetting these obligations, it had cash of US$77.3m as well as receivables valued at US$83.4m due within 12 months. So its liabilities total US$56.1m more than the combination of its cash and short-term receivables.

Given Neo Performance Materials has a market capitalization of US$500.5m, 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, Neo Performance Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Neo Performance Materials

On top of that, Neo Performance Materials grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Neo Performance Materials 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Neo Performance Materials has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Neo Performance Materials recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although Neo Performance Materials's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$6.18m. And it impressed us with its EBIT growth of 64% over the last year. So we are not troubled with Neo Performance Materials's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Neo Performance Materials 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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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.