Is NextPlat (NASDAQ:NXPL) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that NextPlat Corp (NASDAQ:NXPL) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for NextPlat

What Is NextPlat's Debt?

The image below, which you can click on for greater detail, shows that NextPlat had debt of US$1.57m at the end of September 2024, a reduction from US$1.66m over a year. However, it does have US$20.4m in cash offsetting this, leading to net cash of US$18.8m.

How Healthy Is NextPlat's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NextPlat had liabilities of US$9.67m due within 12 months and liabilities of US$1.63m due beyond that. Offsetting this, it had US$20.4m in cash and US$8.59m in receivables that were due within 12 months. So it can boast US$17.6m more liquid assets than total liabilities.

This surplus liquidity suggests that NextPlat's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, NextPlat 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 it is NextPlat'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.

Over 12 months, NextPlat reported revenue of US$66m, which is a gain of 180%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is NextPlat?

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 NextPlat had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$4.7m of cash and made a loss of US$13m. While this does make the company a bit risky, it's important to remember it has net cash of US$18.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, NextPlat's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for NextPlat (2 make us uncomfortable) you should be aware of.

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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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.