Is Novonix (ASX:NVX) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Novonix Limited (ASX:NVX) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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.

View our latest analysis for Novonix

What Is Novonix's Net Debt?

The chart below, which you can click on for greater detail, shows that Novonix had US$36.2m in debt in December 2022; about the same as the year before. But it also has US$99.0m in cash to offset that, meaning it has US$62.9m net cash.

How Strong Is Novonix's Balance Sheet?

According to the last reported balance sheet, Novonix had liabilities of US$8.47m due within 12 months, and liabilities of US$42.9m due beyond 12 months. On the other hand, it had cash of US$99.0m and US$2.85m worth of receivables due within a year. So it actually has US$50.5m more liquid assets than total liabilities.

This excess liquidity suggests that Novonix is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 ultimately the future profitability of the business will decide if Novonix can strengthen its balance sheet over time. 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 7.8%, to US$5.4m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Novonix?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Novonix had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$87m of cash and made a loss of US$56m. With only US$62.9m 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. For example, we've discovered 2 warning signs for Novonix (1 shouldn't be ignored!) 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.

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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.