Is Nexstim (HEL:NXTMH) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Nexstim Plc (HEL:NXTMH) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nexstim

What Is Nexstim's Debt?

The image below, which you can click on for greater detail, shows that Nexstim had debt of €4.41m at the end of June 2021, a reduction from €5.21m over a year. However, its balance sheet shows it holds €6.69m in cash, so it actually has €2.28m net cash.

How Healthy Is Nexstim's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nexstim had liabilities of €3.02m due within 12 months and liabilities of €3.90m due beyond that. Offsetting these obligations, it had cash of €6.69m as well as receivables valued at €1.84m due within 12 months. So it actually has €1.61m more liquid assets than total liabilities.

This short term liquidity is a sign that Nexstim could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nexstim has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nexstim's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Nexstim wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to €5.9m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Nexstim?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Nexstim lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €3.6m and booked a €3.9m accounting loss. Given it only has net cash of €2.28m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Nexstim may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 4 warning signs for Nexstim you should be aware of, and 1 of them is significant.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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