Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that NanoRepro AG (ETR:NN6) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is NanoRepro's Debt?
As you can see below, NanoRepro had €238 of debt at December 2018, down from €135.9k a year prior. However, its balance sheet shows it holds €1.77m in cash, so it actually has €1.77m net cash.
A Look At NanoRepro's Liabilities
Zooming in on the latest balance sheet data, we can see that NanoRepro had liabilities of €188.1k due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of €1.77m as well as receivables valued at €603.5k due within 12 months. So it actually has €2.19m more liquid assets than total liabilities.
It's good to see that NanoRepro has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that NanoRepro has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NanoRepro will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year NanoRepro managed to grow its revenue by 39%, to €2.7m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is NanoRepro?
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 NanoRepro lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €699k of cash and made a loss of €290k. But at least it has €1.8m on the balance sheet to spend on growth, near-term. NanoRepro's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how NanoRepro's profit, revenue, and operating cashflow have changed over the last few years.
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.
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.