Is NOVONIX (ASX:NVX) Weighed On By Its Debt Load?

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. As with many other companies NOVONIX Limited (ASX:NVX) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NOVONIX

What Is NOVONIX's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 NOVONIX had debt of US$64.6m, up from US$36.2m in one year. However, its balance sheet shows it holds US$78.7m in cash, so it actually has US$14.2m net cash.

A Look At NOVONIX's Liabilities

The latest balance sheet data shows that NOVONIX had liabilities of US$7.84m due within a year, and liabilities of US$71.6m falling due after that. On the other hand, it had cash of US$78.7m and US$3.56m worth of receivables due within a year. So it actually has US$2.87m more liquid assets than total liabilities.

Having regard to NOVONIX's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$302.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, NOVONIX reported revenue of US$8.1m, which is a gain of 49%, 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 the fact is that over the last twelve months NOVONIX lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$55m and booked a US$46m accounting loss. However, it has net cash of US$14.2m, so it has a bit of time before it will need more capital. NOVONIX's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.