Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, nCino, Inc. (NASDAQ:NCNO) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is nCino's Net Debt?

The image below, which you can click on for greater detail, shows that at April 2024 nCino had debt of US$55.0m, up from US$15.0m in one year. But it also has US$129.5m in cash to offset that, meaning it has US$74.5m net cash.

How Healthy Is nCino's Balance Sheet?

According to the last reported balance sheet, nCino had liabilities of US$221.7m due within 12 months, and liabilities of US$134.2m due beyond 12 months. Offsetting these obligations, it had cash of US$129.5m as well as receivables valued at US$78.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$147.9m.

Since publicly traded nCino shares are worth a total of US$3.81b, 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. Despite its noteworthy liabilities, nCino boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if nCino 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 nCino wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to US$491m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is nCino?

While nCino lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$78m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with nCino , and understanding them should be part of your investment process.

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.

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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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