Is NanoXplore (CVE:GRA) Weighed On By Its Debt Load?

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. Importantly, NanoXplore Inc. (CVE:GRA) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NanoXplore

What Is NanoXplore's Debt?

You can click the graphic below for the historical numbers, but it shows that NanoXplore had CA$15.2m of debt in March 2021, down from CA$24.4m, one year before. But it also has CA$60.2m in cash to offset that, meaning it has CA$45.0m net cash.

How Strong Is NanoXplore's Balance Sheet?

The latest balance sheet data shows that NanoXplore had liabilities of CA$21.5m due within a year, and liabilities of CA$20.0m falling due after that. Offsetting this, it had CA$60.2m in cash and CA$11.3m in receivables that were due within 12 months. So it actually has CA$29.9m 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. Succinctly put, NanoXplore boasts net cash, so it's fair to say it does not have a heavy debt load! 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 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 had a loss before interest and tax, and actually shrunk its revenue by 20%, to CA$60m. That's not what we would hope to see.

So How Risky Is NanoXplore?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months NanoXplore lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$13m of cash and made a loss of CA$9.2m. With only CA$45.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for NanoXplore you should be aware of, and 1 of them is potentially serious.

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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