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, Nanoco Group plc (LON:NANO) does carry debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Nanoco Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of January 2019 Nanoco Group had UK£420.0k of debt, an increase on , over one year. But on the other hand it also has UK£6.16m in cash, leading to a UK£5.74m net cash position.
A Look At Nanoco Group's Liabilities
We can see from the most recent balance sheet that Nanoco Group had liabilities of UK£2.28m falling due within a year, and liabilities of UK£5.06m due beyond that. Offsetting these obligations, it had cash of UK£6.16m as well as receivables valued at UK£2.78m due within 12 months. So it can boast UK£1.59m more liquid assets than total liabilities.
This surplus suggests that Nanoco Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanoco Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Nanoco Group's ability to maintain a healthy balance sheet going forward. 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, Nanoco Group reported revenue of UK£6.3m, which is a gain of 646%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Nanoco Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nanoco Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£3.0m of cash and made a loss of UK£4.3m. However, it has net cash of UK£5.74m, so it has a bit of time before it will need more capital. Importantly, Nanoco Group's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Nanoco Group insider transactions.
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.
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