Is NeoPhotonics (NYSE:NPTN) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies NeoPhotonics Corporation (NYSE:NPTN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NeoPhotonics

What Is NeoPhotonics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NeoPhotonics had US$30.4m of debt in June 2021, down from US$36.1m, one year before. But it also has US$97.2m in cash to offset that, meaning it has US$66.8m net cash.

How Healthy Is NeoPhotonics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NeoPhotonics had liabilities of US$75.1m due within 12 months and liabilities of US$50.7m due beyond that. Offsetting these obligations, it had cash of US$97.2m as well as receivables valued at US$56.2m due within 12 months. So it can boast US$27.5m more liquid assets than total liabilities.

This surplus suggests that NeoPhotonics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NeoPhotonics 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 ultimately the future profitability of the business will decide if NeoPhotonics can strengthen its balance sheet over time. 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, NeoPhotonics made a loss at the EBIT level, and saw its revenue drop to US$297m, which is a fall of 25%. That makes us nervous, to say the least.

So How Risky Is NeoPhotonics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that NeoPhotonics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$15m and booked a US$45m accounting loss. Given it only has net cash of US$66.8m, the company may need to raise more capital if it doesn't reach break-even soon. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that NeoPhotonics is showing 4 warning signs in our investment analysis , you should know about...

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.