Does Nouveau Monde Graphite (TSE:NOU) Have A Healthy Balance Sheet?

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.' 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. Importantly, Nouveau Monde Graphite Inc. (TSE:NOU) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Nouveau Monde Graphite's Net Debt?

The image below, which you can click on for greater detail, shows that Nouveau Monde Graphite had debt of CA$17.3m at the end of December 2024, a reduction from CA$55.4m over a year. But on the other hand it also has CA$106.3m in cash, leading to a CA$89.0m net cash position.

A Look At Nouveau Monde Graphite's Liabilities

We can see from the most recent balance sheet that Nouveau Monde Graphite had liabilities of CA$47.0m falling due within a year, and liabilities of CA$3.47m due beyond that. On the other hand, it had cash of CA$106.3m and CA$3.18m worth of receivables due within a year. So it can boast CA$59.0m more liquid assets than total liabilities.

This surplus suggests that Nouveau Monde Graphite is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Nouveau Monde Graphite 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 Nouveau Monde Graphite'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 .

Check out our latest analysis for Nouveau Monde Graphite

Given its lack of meaningful operating revenue, investors are probably hoping that Nouveau Monde Graphite finds some valuable resources, before it runs out of money.

So How Risky Is Nouveau Monde Graphite?

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 Nouveau Monde Graphite lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$66m of cash and made a loss of CA$73m. However, it has net cash of CA$89.0m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 instance, we've identified 3 warning signs for Nouveau Monde Graphite that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.