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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Newron Pharmaceuticals S.p.A. (VTX:NWRN) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Newron Pharmaceuticals's Debt?
As you can see below, at the end of December 2020, Newron Pharmaceuticals had €25.7m of debt, up from €16.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds €31.3m in cash, so it actually has €5.58m net cash.
How Healthy Is Newron Pharmaceuticals' Balance Sheet?
The latest balance sheet data shows that Newron Pharmaceuticals had liabilities of €6.89m due within a year, and liabilities of €27.1m falling due after that. On the other hand, it had cash of €31.3m and €6.62m worth of receivables due within a year. So it can boast €3.92m more liquid assets than total liabilities.
This surplus suggests that Newron Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Newron Pharmaceuticals 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 ultimately the future profitability of the business will decide if Newron Pharmaceuticals 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 Newron Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 25%, to €5.3m. To be frank that doesn't bode well.
So How Risky Is Newron Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Newron Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €16m of cash and made a loss of €21m. However, it has net cash of €5.58m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Newron Pharmaceuticals you should know about.
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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