NuEnergy Gas (ASX:NGY) Is Carrying A Fair Bit Of Debt

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 can see that NuEnergy Gas Limited (ASX:NGY) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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 NuEnergy Gas

What Is NuEnergy Gas's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 NuEnergy Gas had AU$4.56m of debt, an increase on AU$4.15m, over one year. However, it also had AU$2.04m in cash, and so its net debt is AU$2.52m.

How Healthy Is NuEnergy Gas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NuEnergy Gas had liabilities of AU$16.1m due within 12 months and no liabilities due beyond that. Offsetting this, it had AU$2.04m in cash and AU$116.7k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$14.0m.

This deficit isn't so bad because NuEnergy Gas is worth AU$44.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is NuEnergy Gas's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since NuEnergy Gas doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.

Caveat Emptor

Over the last twelve months NuEnergy Gas produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at AU$617k. 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. However, it doesn't help that it burned through AU$2.1m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example NuEnergy Gas has 4 warning signs (and 3 which are significant) we think you should know about.

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.

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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.