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.' 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 can see that Nautilus, Inc. (NYSE:NLS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at 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 Nautilus had debt of US$15.9m at the end of June 2023, a reduction from US$37.0m over a year. However, it does have US$17.3m in cash offsetting this, leading to net cash of US$1.43m.

How Strong Is Nautilus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nautilus had liabilities of US$43.3m due within 12 months and liabilities of US$37.8m due beyond that. On the other hand, it had cash of US$17.3m and US$20.5m worth of receivables due within a year. So it has liabilities totalling US$43.3m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$30.7m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Nautilus has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Nautilus made a loss at the EBIT level, and saw its revenue drop to US$274m, which is a fall of 40%. That makes us nervous, to say the least.

So How Risky Is Nautilus?

While Nautilus lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$23m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Nautilus 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. 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.