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.
Why Does Debt Bring Risk?
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, 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is NexGen Energy’s Debt?
The image below, which you can click on for greater detail, shows that NexGen Energy had debt of CA$122.2m at the end of March 2019, a reduction from CA$136.1m over a year. On the flip side, it has CA$103.9m in cash leading to net debt of about CA$18.4m.
How Healthy Is NexGen Energy’s Balance Sheet?
According to the last reported balance sheet, NexGen Energy had liabilities of CA$9.52m due within 12 months, and liabilities of CA$125.2m due beyond 12 months. Offsetting these obligations, it had cash of CA$103.9m as well as receivables valued at CA$1.26m due within 12 months. So its liabilities total CA$29.6m more than the combination of its cash and short-term receivables.
Of course, NexGen Energy has a market capitalization of CA$743.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Since NexGen Energy does have net debt, we think it is worthwhile for shareholders to keep an eye on the balance sheet, over time. There’s no doubt that we learn most about debt from the balance sheet. 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.
Over the last twelve months NexGen Energy produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CA$27m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$57m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. For riskier companies like NexGen Energy I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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