Is Nischer Properties (NGM:NIS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Nischer Properties AB (publ) (NGM:NIS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nischer Properties

What Is Nischer Properties's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Nischer Properties had kr140.0m of debt, an increase on kr58.7m, over one year. However, it does have kr57.3m in cash offsetting this, leading to net debt of about kr82.8m.

How Strong Is Nischer Properties' Balance Sheet?

According to the last reported balance sheet, Nischer Properties had liabilities of kr22.0m due within 12 months, and liabilities of kr186.5m due beyond 12 months. Offsetting these obligations, it had cash of kr57.3m as well as receivables valued at kr7.65m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr143.6m.

Given this deficit is actually higher than the company's market capitalization of kr133.4m, we think shareholders really should watch Nischer Properties's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nischer Properties's earnings that will influence how the balance sheet holds up in the future. 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 Nischer Properties wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to kr14m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Nischer Properties managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping kr20m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr29m over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 4 warning signs for Nischer Properties (2 make us uncomfortable) 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. 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.