Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Nouveau Monde Graphite Inc. (CVE:NOU) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Nouveau Monde Graphite's Debt?
As you can see below, Nouveau Monde Graphite had CA$16.7m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CA$81.3m in cash, leading to a CA$64.6m net cash position.
How Strong Is Nouveau Monde Graphite's Balance Sheet?
The latest balance sheet data shows that Nouveau Monde Graphite had liabilities of CA$16.1m due within a year, and liabilities of CA$19.4m falling due after that. Offsetting this, it had CA$81.3m in cash and CA$9.69m in receivables that were due within 12 months. So it can boast CA$55.5m more liquid assets than total liabilities.
This surplus suggests that Nouveau Monde Graphite has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 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, 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?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Nouveau Monde Graphite had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$57m and booked a CA$37m accounting loss. Given it only has net cash of CA$64.6m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Nouveau Monde Graphite (4 are significant) you should be aware of.
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.
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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