Here's Why New Leaf Ventures (CSE:NLV) Can Afford Some Debt

Warren Buffett famously said, '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. We note that New Leaf Ventures Inc (CSE:NLV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for New Leaf Ventures

What Is New Leaf Ventures's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 New Leaf Ventures had CA$2.41m of debt, an increase on CA$36.3k, over one year. However, because it has a cash reserve of CA$418.2k, its net debt is less, at about CA$1.99m.

A Look At New Leaf Ventures' Liabilities

According to the last reported balance sheet, New Leaf Ventures had liabilities of CA$1.97m due within 12 months, and liabilities of CA$4.02m due beyond 12 months. Offsetting this, it had CA$418.2k in cash and CA$1.65m in receivables that were due within 12 months. So it has liabilities totalling CA$3.91m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since New Leaf Ventures has a market capitalization of CA$10.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since New Leaf Ventures will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least New Leaf Ventures booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Over the last twelve months New Leaf Ventures produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$2.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$2.6m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for New Leaf Ventures (3 make us uncomfortable) you should be aware of.

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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