Would Indiva (CVE:NDVA) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Indiva Limited (CVE:NDVA) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Indiva

What Is Indiva's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Indiva had debt of CA$10.8m, up from CA$4.98m in one year. On the flip side, it has CA$420.1k in cash leading to net debt of about CA$10.4m.

How Healthy Is Indiva's Balance Sheet?

The latest balance sheet data shows that Indiva had liabilities of CA$15.1m due within a year, and liabilities of CA$8.74m falling due after that. Offsetting these obligations, it had cash of CA$420.1k as well as receivables valued at CA$3.36m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$20.1m.

This deficit is considerable relative to its market capitalization of CA$24.7m, so it does suggest shareholders should keep an eye on Indiva's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Indiva can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Indiva wasn't profitable at an EBIT level, but managed to grow its revenue by 1,098%, to CA$7.9m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Indiva still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$7.1m at the EBIT level. 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. However, it doesn't help that it burned through CA$9.9m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Indiva (of which 1 is significant!) you should know about.

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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