Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Novo Integrated Sciences, Inc. (NASDAQ:NVOS) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Novo Integrated Sciences's Debt?
The image below, which you can click on for greater detail, shows that Novo Integrated Sciences had debt of US$1.54m at the end of May 2021, a reduction from US$1.99m over a year. However, its balance sheet shows it holds US$8.37m in cash, so it actually has US$6.83m net cash.
How Healthy Is Novo Integrated Sciences' Balance Sheet?
We can see from the most recent balance sheet that Novo Integrated Sciences had liabilities of US$3.52m falling due within a year, and liabilities of US$2.09m due beyond that. Offsetting these obligations, it had cash of US$8.37m as well as receivables valued at US$1.30m due within 12 months. So it can boast US$4.05m more liquid assets than total liabilities.
This surplus suggests that Novo Integrated Sciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Novo Integrated Sciences boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Novo Integrated Sciences's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Novo Integrated Sciences's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Novo Integrated Sciences?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Novo Integrated Sciences had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$504k of cash and made a loss of US$6.7m. But at least it has US$6.83m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Novo Integrated Sciences (1 shouldn't be ignored!) 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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What are the risks and opportunities for Novo Integrated Sciences?
Earnings have declined by 50.1% per year over past 5 years
Has less than 1 year of cash runway
Shareholders have been substantially diluted in the past year
Does not have a meaningful market cap ($16M)
Latest financial reports are more than 6 months old
Volatile share price over the past 3 months
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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