The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Novonix Limited (ASX:NVX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Novonix's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Novonix had AU$2.21m of debt in June 2020, down from AU$17.2m, one year before. However, it does have AU$38.8m in cash offsetting this, leading to net cash of AU$36.6m.
How Healthy Is Novonix's Balance Sheet?
The latest balance sheet data shows that Novonix had liabilities of AU$4.01m due within a year, and liabilities of AU$4.72m falling due after that. Offsetting these obligations, it had cash of AU$38.8m as well as receivables valued at AU$1.23m due within 12 months. So it can boast AU$31.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Novonix could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Novonix 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 ultimately the future profitability of the business will decide if Novonix can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Novonix wasn't profitable at an EBIT level, but managed to grow its revenue by 133%, to AU$4.3m. So there's no doubt that shareholders are cheering for growth
So How Risky Is Novonix?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Novonix had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$11m and booked a AU$20m accounting loss. With only AU$36.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Novonix's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Novonix (of which 2 are a bit unpleasant!) 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. 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.
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