Nexstim (HEL:NXTMH) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Nexstim Plc (HEL:NXTMH) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nexstim

What Is Nexstim's Debt?

You can click the graphic below for the historical numbers, but it shows that Nexstim had €4.41m of debt in June 2021, down from €5.21m, one year before. But on the other hand it also has €6.69m in cash, leading to a €2.28m net cash position.

How Strong 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 can boast €1.61m more liquid assets than total liabilities.

This surplus suggests that Nexstim has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nexstim boasts net cash, so it's fair to say it does not have a heavy debt load! 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. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 in the last year Nexstim had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €3.6m of cash and made a loss of €3.9m. 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. Nexstim's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 3 warning signs for Nexstim (1 is a bit concerning) you should be aware of.

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.