Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, NeoPhotonics Corporation (NYSE:NPTN) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does NeoPhotonics Carry?
The image below, which you can click on for greater detail, shows that NeoPhotonics had debt of US$48.2m at the end of June 2019, a reduction from US$67.9m over a year. But it also has US$65.1m in cash to offset that, meaning it has US$16.9m net cash.
How Healthy Is NeoPhotonics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NeoPhotonics had liabilities of US$97.9m due within 12 months and liabilities of US$72.7m due beyond that. Offsetting this, it had US$65.1m in cash and US$64.5m in receivables that were due within 12 months. So it has liabilities totalling US$41.1m more than its cash and near-term receivables, combined.
Given NeoPhotonics has a market capitalization of US$321.9m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, NeoPhotonics also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NeoPhotonics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year NeoPhotonics managed to grow its revenue by 12%, to US$334m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is NeoPhotonics?
While NeoPhotonics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$25m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like NeoPhotonics I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.