Is NuEnergy Gas (ASX:NGY) Using Debt In A Risky Way?

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. Importantly, NuEnergy Gas Limited (ASX:NGY) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NuEnergy Gas

What Is NuEnergy Gas's Debt?

As you can see below, at the end of December 2021, NuEnergy Gas had AU$3.85m of debt, up from AU$3.39m a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$4.73m in cash, so it actually has AU$881.3k net cash.

How Strong Is NuEnergy Gas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NuEnergy Gas had liabilities of AU$14.5m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of AU$4.73m as well as receivables valued at AU$212.2k due within 12 months. So it has liabilities totalling AU$9.56m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since NuEnergy Gas has a market capitalization of AU$41.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, NuEnergy Gas boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is NuEnergy Gas'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.

Given its lack of meaningful operating revenue, NuEnergy Gas shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is NuEnergy Gas?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months NuEnergy Gas lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$2.1m of cash and made a loss of AU$4.3m. With only AU$881.3k on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example NuEnergy Gas has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.