Is Nanologica (NGM:NICA) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Nanologica AB (publ) (NGM:NICA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanologica

What Is Nanologica's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Nanologica had kr32.7m of debt, an increase on kr8.45m, over one year. However, it does have kr58.4m in cash offsetting this, leading to net cash of kr25.7m.

How Healthy Is Nanologica's Balance Sheet?

The latest balance sheet data shows that Nanologica had liabilities of kr19.0m due within a year, and liabilities of kr34.4m falling due after that. Offsetting these obligations, it had cash of kr58.4m as well as receivables valued at kr3.11m due within 12 months. So it can boast kr8.10m more liquid assets than total liabilities.

Having regard to Nanologica's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr426.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Nanologica has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Nanologica's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nanologica wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to kr20m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nanologica?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Nanologica had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr46m and booked a kr23m accounting loss. With only kr25.7m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Nanologica may be on a path to profitability. 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 4 warning signs for Nanologica (1 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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