Is Novonix (ASX:NVX) Using Too Much Debt?

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.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Novonix

What Is Novonix's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Novonix had debt of AU$53.6m, up from AU$6.26m in one year. But on the other hand it also has AU$207.1m in cash, leading to a AU$153.5m net cash position.

How Healthy Is Novonix's Balance Sheet?

We can see from the most recent balance sheet that Novonix had liabilities of AU$11.4m falling due within a year, and liabilities of AU$63.8m due beyond that. Offsetting these obligations, it had cash of AU$207.1m as well as receivables valued at AU$3.56m due within 12 months. So it actually has AU$135.4m 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. Simply put, the fact that Novonix has more cash than debt is arguably a good indication that it can manage its debt safely. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Novonix reported revenue of AU$8.4m, which is a gain of 61%, although it did not report any earnings before interest and tax. 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 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$156m of cash and made a loss of AU$71m. With only AU$153.5m 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. For example, we've discovered 2 warning signs for Novonix 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.