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.' 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, NanoString Technologies, Inc. (NASDAQ:NSTG) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
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 it also has US$398.0m in cash to offset that, meaning it has US$173.6m net cash.
How Strong Is NanoString Technologies' Balance Sheet?
We can see from the most recent balance sheet that NanoString Technologies had liabilities of US$43.1m falling due within a year, and liabilities of US$250.2m due beyond that. Offsetting this, it had US$398.0m in cash and US$32.0m in receivables that were 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NanoString Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year NanoString Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$134m. 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 in the last year NanoString Technologies had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$82m and booked a US$99m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$173.6m. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NanoString Technologies is showing 4 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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