Is Novonix (ASX:NVX) Using Too Much 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Novonix had AU$49.7m of debt, an increase on AU$2.10m, over one year. However, its balance sheet shows it holds AU$259.5m in cash, so it actually has AU$209.9m net cash.

How Strong Is Novonix's Balance Sheet?

According to the last reported balance sheet, Novonix had liabilities of AU$5.28m due within 12 months, and liabilities of AU$59.5m due beyond 12 months. Offsetting these obligations, it had cash of AU$259.5m as well as receivables valued at AU$3.54m due within 12 months. So it actually has AU$198.2m 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Novonix reported revenue of AU$6.9m, which is a gain of 77%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Novonix?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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 AU$132m of cash and made a loss of AU$36m. With only AU$209.9m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. Be aware that Novonix is showing 3 warning signs in our investment analysis , 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. 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.