Is NANO (KOSDAQ:187790) A Risky Investment?

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.' 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. We note that NANO Co., Ltd. (KOSDAQ:187790) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for NANO

What Is NANO's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 NANO had debt of ₩34.7b, up from ₩28.1b in one year. However, because it has a cash reserve of ₩9.86b, its net debt is less, at about ₩24.8b.

How Healthy Is NANO's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NANO had liabilities of ₩47.9b due within 12 months and liabilities of ₩14.8b due beyond that. On the other hand, it had cash of ₩9.86b and ₩13.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩39.0b.

Given this deficit is actually higher than the company's market capitalization of ₩37.9b, we think shareholders really should watch NANO's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NANO will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, NANO made a loss at the EBIT level, and saw its revenue drop to ₩59b, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While NANO's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩8.0b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩5.0b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - NANO has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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