Health Check: How Prudently Does Nouveau Monde Graphite (CVE:NOU) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nouveau Monde Graphite Inc. (CVE:NOU) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nouveau Monde Graphite

What Is Nouveau Monde Graphite's Net Debt?

As you can see below, Nouveau Monde Graphite had CA$15.8m of debt at June 2024, down from CA$53.5m a year prior. But it also has CA$73.9m in cash to offset that, meaning it has CA$58.1m net cash.

How Healthy Is Nouveau Monde Graphite's Balance Sheet?

We can see from the most recent balance sheet that Nouveau Monde Graphite had liabilities of CA$43.4m falling due within a year, and liabilities of CA$3.28m due beyond that. On the other hand, it had cash of CA$73.9m and CA$2.76m worth of receivables due within a year. So it actually has CA$29.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Nouveau Monde Graphite could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nouveau Monde Graphite boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nouveau Monde Graphite can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Nouveau Monde Graphite has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

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 in the last year Nouveau Monde Graphite had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$55m of cash and made a loss of CA$75m. However, it has net cash of CA$58.1m, 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Nouveau Monde Graphite has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.