Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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 Nutriband Inc. (NASDAQ:NTRB) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Nutriband’s Debt?
The image below, which you can click on for greater detail, shows that at July 2021 Nutriband had debt of US$1.70m, up from US$139.4k in one year. However, because it has a cash reserve of US$304.3k, its net debt is less, at about US$1.39m.
A Look At Nutriband’s Liabilities
Zooming in on the latest balance sheet data, we can see that Nutriband had liabilities of US$2.66m due within 12 months and liabilities of US$191.9k due beyond that. Offsetting these obligations, it had cash of US$304.3k as well as receivables valued at US$13.8k due within 12 months. So its liabilities total US$2.53m more than the combination of its cash and short-term receivables.
Since publicly traded Nutriband shares are worth a total of US$42.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nutriband can strengthen its balance sheet over time.
In the last year Nutriband wasn’t profitable at an EBIT level, but managed to grow its revenue by 353%, to US$1.4m. That’s virtually the hole-in-one of revenue growth!
While we can certainly appreciate Nutriband’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$3.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$401k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky.