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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that NanoString Technologies, Inc. (NASDAQ:NSTG) 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?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is NanoString Technologies's Net Debt?
As you can see below, at the end of June 2021, NanoString Technologies had US$224.4m of debt, up from US$167.3m a year ago. Click the image for more detail. But on the other hand it also has US$398.0m in cash, leading to a US$173.6m net cash position.
How Healthy Is NanoString Technologies' Balance Sheet?
According to the last reported balance sheet, NanoString Technologies had liabilities of US$43.1m due within 12 months, and liabilities of US$250.2m due beyond 12 months. Offsetting these obligations, it had cash of US$398.0m as well as receivables valued at US$32.0m due within 12 months. So it can boast US$136.7m more liquid assets than total liabilities.
This short term liquidity is a sign that NanoString Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NanoString Technologies has more cash than debt is arguably a good indication that 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 NanoString Technologies'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, NanoString Technologies reported revenue of US$134m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is NanoString Technologies?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months NanoString Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$82m and booked a US$99m accounting loss. But the saving grace is the US$173.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that NanoString Technologies is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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