Does Novo Integrated Sciences (NASDAQ:NVOS) Have A Healthy Balance Sheet?

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.' 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 Novo Integrated Sciences, Inc. (NASDAQ:NVOS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Novo Integrated Sciences

How Much Debt Does Novo Integrated Sciences Carry?

As you can see below, Novo Integrated Sciences had US$1.52m of debt at November 2020, down from US$2.05m a year prior. But it also has US$1.97m in cash to offset that, meaning it has US$449.7k net cash.

How Healthy Is Novo Integrated Sciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Novo Integrated Sciences had liabilities of US$2.59m due within 12 months and liabilities of US$3.09m due beyond that. Offsetting this, it had US$1.97m in cash and US$1.46m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.26m.

Having regard to Novo Integrated Sciences' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$116.8m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Novo Integrated Sciences boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Novo Integrated Sciences will need earnings to service that debt. 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 Novo Integrated Sciences had a loss before interest and tax, and actually shrunk its revenue by 23%, to US$7.5m. To be frank that doesn't bode well.

So How Risky Is Novo Integrated Sciences?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Novo Integrated Sciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$304k of cash and made a loss of US$5.6m. But at least it has US$449.7k on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 3 warning signs with Novo Integrated Sciences (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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