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Nova Eye Medical (ASX:EYE) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Nova Eye Medical Limited (ASX:EYE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nova Eye Medical

How Much Debt Does Nova Eye Medical Carry?

As you can see below, at the end of June 2021, Nova Eye Medical had AU$3.70m of debt, up from AU$1.55m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$17.8m in cash, so it actually has AU$14.1m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Nova Eye Medical's Liabilities

The latest balance sheet data shows that Nova Eye Medical had liabilities of AU$4.69m due within a year, and liabilities of AU$1.97m falling due after that. On the other hand, it had cash of AU$17.8m and AU$5.43m worth of receivables due within a year. So it actually has AU$16.6m more liquid assets than total liabilities.

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This excess liquidity suggests that Nova Eye Medical is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Nova Eye Medical 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 Nova Eye Medical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Nova Eye Medical reported revenue of AU$14m, which is a gain of 8.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Nova Eye 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 Nova Eye Medical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$15m of cash and made a loss of AU$4.4m. With only AU$14.1m on the balance sheet, it would appear that its going to need to raise capital again 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. 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 instance, we've identified 4 warning signs for Nova Eye Medical (2 are a bit concerning) you should be aware of.

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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