Is Nutriband (NASDAQ:NTRB) A Risky Investment?

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.' 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 Nutriband Inc. (NASDAQ:NTRB) makes use of debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nutriband

What Is Nutriband's Debt?

As you can see below, at the end of October 2023, Nutriband had US$2.21m of debt, up from US$126.8k a year ago. Click the image for more detail. However, it also had US$1.27m in cash, and so its net debt is US$946.7k.

How Healthy Is Nutriband's Balance Sheet?

The latest balance sheet data shows that Nutriband had liabilities of US$717.8k due within a year, and liabilities of US$2.09m falling due after that. Offsetting this, it had US$1.27m in cash and US$169.7k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.38m.

Of course, Nutriband has a market capitalization of US$38.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nutriband'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 Nutriband wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to US$2.1m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Nutriband had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$4.9m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$3.6m of cash over the last year. So suffice it to say we consider the stock very risky. 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 6 warning signs for Nutriband (of which 2 are a bit concerning!) you should know about.

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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