Is Nicox (EPA:COX) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Nicox S.A. (EPA:COX) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nicox

What Is Nicox's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Nicox had €18.0m of debt, an increase on €11.1m, over one year. However, its balance sheet shows it holds €47.2m in cash, so it actually has €29.2m net cash.

How Healthy Is Nicox's Balance Sheet?

The latest balance sheet data shows that Nicox had liabilities of €15.4m due within a year, and liabilities of €26.1m falling due after that. On the other hand, it had cash of €47.2m and €2.70m worth of receivables due within a year. So it actually has €8.44m more liquid assets than total liabilities.

This surplus suggests that Nicox has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nicox boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nicox'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 Nicox wasn't profitable at an EBIT level, but managed to grow its revenue by 89%, to €13m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Nicox?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nicox lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €5.4m and booked a €18m accounting loss. But at least it has €29.2m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Nicox may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger 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. Case in point: We've spotted 2 warning signs for Nicox you should be aware of.

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. 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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