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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nova Minerals

How Much Debt Does Nova Minerals Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Nova Minerals had AU$6.28m of debt, an increase on none, over one year. But on the other hand it also has AU$19.2m in cash, leading to a AU$13.0m net cash position.

How Strong Is Nova Minerals' Balance Sheet?

According to the last reported balance sheet, Nova Minerals had liabilities of AU$3.59m due within 12 months, and liabilities of AU$5.35m due beyond 12 months. Offsetting these obligations, it had cash of AU$19.2m as well as receivables valued at AU$272.0k due within 12 months. So it can boast AU$10.6m more liquid assets than total liabilities.

This excess liquidity suggests that Nova Minerals is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nova Minerals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Nova Minerals has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Nova Minerals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nova Minerals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$27m of cash and made a loss of AU$11m. With only AU$13.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for Nova Minerals (1 is a bit concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.