David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies NexGen Energy Ltd. (TSE:NXE) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
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What Is NexGen Energy's Net Debt?
The image below, which you can click on for greater detail, shows that NexGen Energy had debt of CA$73.6m at the end of September 2021, a reduction from CA$177.0m over a year. However, it does have CA$237.7m in cash offsetting this, leading to net cash of CA$164.1m.
How Strong Is NexGen Energy's Balance Sheet?
We can see from the most recent balance sheet that NexGen Energy had liabilities of CA$15.0m falling due within a year, and liabilities of CA$79.0m due beyond that. Offsetting this, it had CA$237.7m in cash and CA$665.0k in receivables that were due within 12 months. So it can boast CA$144.4m more liquid assets than total liabilities.
This short term liquidity is a sign that NexGen Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NexGen Energy 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 it is future earnings, more than anything, that will determine NexGen Energy'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.
Since NexGen Energy doesn't have significant operating revenue, shareholders must hope it'll sell some fossil fuels, before it runs out of money.
So How Risky Is NexGen Energy?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NexGen Energy lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$38m of cash and made a loss of CA$163m. With only CA$164.1m 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. 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 NexGen Energy is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...
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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About TSX:NXE
NexGen Energy
An exploration and development stage company, engages in the acquisition, exploration, and evaluation and development of uranium properties in Canada.
Moderate with adequate balance sheet.