Health Check: How Prudently Does Novo Integrated Sciences (NASDAQ:NVOS) Use Debt?

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 Novo Integrated Sciences, Inc. (NASDAQ:NVOS) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Novo Integrated Sciences

How Much Debt Does Novo Integrated Sciences Carry?

You can click the graphic below for the historical numbers, but it shows that Novo Integrated Sciences had US$1.54m of debt in May 2021, down from US$1.99m, one year before. However, it does have US$8.37m in cash offsetting this, leading to net cash of US$6.83m.

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 this, it had US$8.37m in cash and US$1.30m in receivables that were due within 12 months. So it can boast US$4.05m more liquid assets than total liabilities.

This short term liquidity is a sign that Novo Integrated Sciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Novo Integrated Sciences boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Novo Integrated Sciences will need earnings to service that debt. 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's not too bad, we'd prefer see growth.

So How Risky Is Novo Integrated Sciences?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Novo Integrated Sciences had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$504k and booked a US$6.7m accounting loss. However, it has net cash of US$6.83m, so it has a bit of time before it will need more capital. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Novo Integrated Sciences (of which 1 can't be ignored!) you should know about.

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.

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.

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