The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that NanoXplore Inc. (CVE:GRA) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
How Much Debt Does NanoXplore Carry?
As you can see below, NanoXplore had CA$23.2m of debt at September 2020, down from CA$25.9m a year prior. But on the other hand it also has CA$26.3m in cash, leading to a CA$3.04m net cash position.
How Healthy Is NanoXplore's Balance Sheet?
According to the last reported balance sheet, NanoXplore had liabilities of CA$21.0m due within 12 months, and liabilities of CA$32.0m due beyond 12 months. Offsetting these obligations, it had cash of CA$26.3m as well as receivables valued at CA$11.5m due within 12 months. So its liabilities total CA$15.3m more than the combination of its cash and short-term receivables.
Of course, NanoXplore has a market capitalization of CA$576.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, NanoXplore also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, NanoXplore made a loss at the EBIT level, and saw its revenue drop to CA$59m, which is a fall of 32%. That makes us nervous, to say the least.
So How Risky Is NanoXplore?
Statistically speaking companies that lose money are riskier than those that make money. 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$19m and booked a CA$7.2m accounting loss. Given it only has net cash of CA$3.04m, 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. Be aware that NanoXplore is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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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