Health Check: How Prudently Does NOVONIX (ASX:NVX) Use Debt?

Warren Buffett famously said, '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, NOVONIX Limited (ASX:NVX) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NOVONIX

What Is NOVONIX's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 NOVONIX had US$64.6m of debt, an increase on US$36.2m, over one year. But on the other hand it also has US$78.7m in cash, leading to a US$14.2m net cash position.

How Healthy Is NOVONIX's Balance Sheet?

We can see from the most recent balance sheet that NOVONIX had liabilities of US$7.84m falling due within a year, and liabilities of US$71.6m due beyond that. Offsetting this, it had US$78.7m in cash and US$3.56m in receivables that were due within 12 months. So it actually has US$2.87m more liquid assets than total liabilities.

This state of affairs indicates that NOVONIX's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$224.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, NOVONIX 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 it is future earnings, more than anything, that will determine NOVONIX's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year NOVONIX wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to US$8.1m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NOVONIX?

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 NOVONIX lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$55m of cash and made a loss of US$46m. However, it has net cash of US$14.2m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, NOVONIX may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with NOVONIX , and understanding them should be part of your investment process.

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.