Is Neolife (EPA:ALNLF) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Neolife SA (EPA:ALNLF) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Neolife

What Is Neolife's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Neolife had debt of €3.28m, up from €1.19m in one year. However, it does have €3.34m in cash offsetting this, leading to net cash of €55.3k.

How Strong Is Neolife's Balance Sheet?

We can see from the most recent balance sheet that Neolife had liabilities of €1.64m falling due within a year, and liabilities of €3.33m due beyond that. Offsetting these obligations, it had cash of €3.34m as well as receivables valued at €1.13m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €493.0k.

Given Neolife has a market capitalization of €20.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Neolife 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 you can't view debt in total isolation; since Neolife will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Neolife had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to €8.4m. That's not what we would hope to see.

So How Risky Is Neolife?

While Neolife lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €362k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Neolife you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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