Nautilus (NYSE:NLS) Has Debt But No Earnings; Should You Worry?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Nautilus, Inc. (NYSE:NLS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nautilus

How Much Debt Does Nautilus Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Nautilus had debt of US$59.7m, up from US$55.8m in one year. However, it does have US$15.5m in cash offsetting this, leading to net debt of about US$44.1m.

How Healthy Is Nautilus' Balance Sheet?

According to the last reported balance sheet, Nautilus had liabilities of US$61.6m due within 12 months, and liabilities of US$80.5m due beyond 12 months. Offsetting these obligations, it had cash of US$15.5m as well as receivables valued at US$44.4m due within 12 months. So its liabilities total US$82.2m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$55.4m, we think shareholders really should watch Nautilus'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. 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 Nautilus'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 Nautilus had a loss before interest and tax, and actually shrunk its revenue by 50%, to US$338m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Nautilus's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$64m 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. Not least because it had negative free cash flow of US$1.4m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Nautilus that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.