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. 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. We note that Newron Pharmaceuticals S.p.A. (VTX:NWRN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Newron Pharmaceuticals's Net Debt?
As you can see below, at the end of December 2019, Newron Pharmaceuticals had €16.7m of debt, up from none a year ago. Click the image for more detail. However, it does have €39.2m in cash offsetting this, leading to net cash of €22.4m.
A Look At Newron Pharmaceuticals's Liabilities
Zooming in on the latest balance sheet data, we can see that Newron Pharmaceuticals had liabilities of €5.60m due within 12 months and liabilities of €17.9m due beyond that. Offsetting these obligations, it had cash of €39.2m as well as receivables valued at €19.5m due within 12 months. So it actually has €35.1m more liquid assets than total liabilities.
This surplus strongly suggests that Newron Pharmaceuticals has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Newron Pharmaceuticals 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 Newron Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Newron Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 75%, to €7.0m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Newron Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Newron Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €22m of cash and made a loss of €20m. However, it has net cash of €22.4m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Newron Pharmaceuticals may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Newron Pharmaceuticals , and understanding them should be part of your investment process.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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