Is NexGen Energy (TSE:NXE) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, NexGen Energy Ltd. (TSE:NXE) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NexGen Energy

How Much Debt Does NexGen Energy Carry?

The image below, which you can click on for greater detail, shows that NexGen Energy had debt of CA$61.8m at the end of June 2021, a reduction from CA$155.4m over a year. But on the other hand it also has CA$237.2m in cash, leading to a CA$175.4m net cash position.

A Look At NexGen Energy's Liabilities

According to the last reported balance sheet, NexGen Energy had liabilities of CA$5.79m due within 12 months, and liabilities of CA$65.7m due beyond 12 months. On the other hand, it had cash of CA$237.2m and CA$370.0k worth of receivables due within a year. So it actually has CA$166.1m 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. Simply put, the fact that NexGen Energy 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 NexGen Energy 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.

Given its lack of meaningful operating revenue, NexGen Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is NexGen Energy?

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 NexGen Energy lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$34m of cash and made a loss of CA$167m. With only CA$175.4m 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 5 warning signs in our investment analysis , and 1 of those is concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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