Nextleaf Solutions (CSE:OILS) Is Carrying A Fair Bit Of Debt

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 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 can see that Nextleaf Solutions Ltd. (CSE:OILS) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nextleaf Solutions

What Is Nextleaf Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Nextleaf Solutions had debt of CA$2.70m, up from CA$40.0k in one year. However, it does have CA$2.01m in cash offsetting this, leading to net debt of about CA$687.6k.

A Look At Nextleaf Solutions' Liabilities

We can see from the most recent balance sheet that Nextleaf Solutions had liabilities of CA$4.28m falling due within a year, and liabilities of CA$1.13m due beyond that. Offsetting this, it had CA$2.01m in cash and CA$561.0k in receivables that were due within 12 months. So its liabilities total CA$2.84m more than the combination of its cash and short-term receivables.

Since publicly traded Nextleaf Solutions shares are worth a total of CA$27.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Nextleaf Solutions 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.

In the last year Nextleaf Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 401%, to CA$2.3m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Nextleaf Solutions still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$5.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$2.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 6 warning signs for Nextleaf Solutions you should be aware of, and 2 of them shouldn't be ignored.

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.
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