Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Nemaura Medical Inc. (NASDAQ:NMRD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Nemaura Medical
What Is Nemaura Medical’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Nemaura Medical had US$25.2m of debt, an increase on US$4.78m, over one year. But it also has US$31.3m in cash to offset that, meaning it has US$6.09m net cash.
How Healthy Is Nemaura Medical’s Balance Sheet?
According to the last reported balance sheet, Nemaura Medical had liabilities of US$12.4m due within 12 months, and liabilities of US$15.3m due beyond 12 months. Offsetting this, it had US$31.3m in cash and US$107.8k in receivables that were due within 12 months. So it actually has US$3.65m more liquid assets than total liabilities.
This short term liquidity is a sign that Nemaura Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nemaura Medical 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 ultimately the future profitability of the business will decide if Nemaura Medical 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.
Since Nemaura Medical doesn’t have significant operating revenue, shareholders must hope it’ll ramp sales of its new medical tech as soon as possible.
So How Risky Is Nemaura Medical?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Nemaura Medical had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$7.8m and booked a US$8.5m accounting loss. Given it only has net cash of US$6.09m, the company may need to raise more capital if it doesn’t reach break-even soon. 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. However, not all investment risk resides within the balance sheet – far from it. We’ve identified 4 warning signs with Nemaura Medical (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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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