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- CEO of Berkshire Hathaway
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies NanoXplore Inc. (TSE:GRA) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does NanoXplore Carry?
The image below, which you can click on for greater detail, shows that NanoXplore had debt of CA$11.7m at the end of September 2021, a reduction from CA$25.1m over a year. But on the other hand it also has CA$43.5m in cash, leading to a CA$31.8m net cash position.
How Healthy Is NanoXplore's Balance Sheet?
According to the last reported balance sheet, NanoXplore had liabilities of CA$20.2m due within 12 months, and liabilities of CA$20.8m due beyond 12 months. On the other hand, it had cash of CA$43.5m and CA$14.6m worth of receivables due within a year. So it actually has CA$17.1m more liquid assets than total liabilities.
Having regard to NanoXplore's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$1.20b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, NanoXplore 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 NanoXplore 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, NanoXplore reported revenue of CA$72m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is NanoXplore?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months NanoXplore lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$21m of cash and made a loss of CA$15m. With only CA$31.8m on the balance sheet, it would appear that its going to need to raise capital again soon. NanoXplore's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for NanoXplore (of which 1 is 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.
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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