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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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?
Why Does Debt Bring Risk?
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. 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does NanoString Technologies Carry?
The image below, which you can click on for greater detail, shows that at December 2020 NanoString Technologies had debt of US$172.7m, up from US$80.0m in one year. However, its balance sheet shows it holds US$440.7m in cash, so it actually has US$268.0m net cash.
A Look At NanoString Technologies' Liabilities
Zooming in on the latest balance sheet data, we can see that NanoString Technologies had liabilities of US$37.1m due within 12 months and liabilities of US$200.1m due beyond that. Offsetting these obligations, it had cash of US$440.7m as well as receivables valued at US$31.1m due within 12 months. So it actually has US$234.6m more liquid assets than total liabilities.
This surplus suggests that NanoString Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NanoString Technologies 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 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.
In the last year NanoString Technologies had a loss before interest and tax, and actually shrunk its revenue by 6.6%, to US$117m. That's not what we would hope to see.
So How Risky Is NanoString Technologies?
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 NanoString Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$89m of cash and made a loss of US$110m. But the saving grace is the US$268.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example - NanoString Technologies has 3 warning signs we think you should be aware of.
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.
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. 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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