Is Nextleaf Solutions (CSE:OILS) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Nextleaf Solutions Ltd. (CSE:OILS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nextleaf Solutions

What Is Nextleaf Solutions's Net Debt?

As you can see below, at the end of March 2021, Nextleaf Solutions had CA$2.44m of debt, up from CA$10.0 a year ago. Click the image for more detail. However, it does have CA$3.12m in cash offsetting this, leading to net cash of CA$685.3k.

How Strong Is Nextleaf Solutions' Balance Sheet?

We can see from the most recent balance sheet that Nextleaf Solutions had liabilities of CA$3.58m falling due within a year, and liabilities of CA$991.1k due beyond that. Offsetting these obligations, it had cash of CA$3.12m as well as receivables valued at CA$211.2k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.23m.

Since publicly traded Nextleaf Solutions shares are worth a total of CA$29.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Nextleaf Solutions 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 you can't view debt in total isolation; since Nextleaf Solutions will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Nextleaf Solutions reported revenue of CA$1.6m, which is a gain of 256%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Nextleaf Solutions?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nextleaf Solutions lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$3.5m and booked a CA$5.4m accounting loss. Given it only has net cash of CA$685.3k, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Nextleaf Solutions has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Nextleaf Solutions (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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.
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