Is NOVONIX (ASX:NVX) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, NOVONIX Limited (ASX:NVX) does carry debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for NOVONIX

What Is NOVONIX's Debt?

As you can see below, at the end of June 2023, NOVONIX had US$64.2m of debt, up from US$37.0m a year ago. Click the image for more detail. But it also has US$99.1m in cash to offset that, meaning it has US$34.9m net cash.

How Strong Is NOVONIX's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NOVONIX had liabilities of US$6.22m due within 12 months and liabilities of US$72.7m due beyond that. On the other hand, it had cash of US$99.1m and US$2.33m worth of receivables due within a year. So it actually has US$22.5m more liquid assets than total liabilities.

This surplus suggests that NOVONIX has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NOVONIX 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 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

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 US$88m and booked a US$53m accounting loss. Given it only has net cash of US$34.9m, the company may need to raise more capital if it doesn't reach break-even 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NOVONIX (of which 1 is potentially serious!) you should know about.

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.

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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.