Is Nova Minerals (ASX:NVA) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Nova Minerals Limited (ASX:NVA) does carry debt. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nova Minerals

What Is Nova Minerals's Net Debt?

As you can see below, at the end of December 2022, Nova Minerals had AU$5.38m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds AU$25.0m in cash, so it actually has AU$19.6m net cash.

How Healthy Is Nova Minerals' Balance Sheet?

The latest balance sheet data shows that Nova Minerals had liabilities of AU$4.62m due within a year, and liabilities of AU$4.45m falling due after that. On the other hand, it had cash of AU$25.0m and AU$320.1k worth of receivables due within a year. So it can boast AU$16.2m more liquid assets than total liabilities.

This surplus suggests that Nova Minerals is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Nova Minerals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Nova Minerals'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Nova Minerals finds some valuable resources, before it runs out of money.

So How Risky Is Nova Minerals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Nova Minerals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through AU$31m of cash and made a loss of AU$60m. With only AU$19.6m 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nova Minerals is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.