Here's Why Nouveau Monde Graphite (CVE:NOU) Can Afford Some Debt

Warren Buffett famously said, '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. As with many other companies Nouveau Monde Graphite Inc. (CVE:NOU) makes use of debt. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nouveau Monde Graphite

What Is Nouveau Monde Graphite's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Nouveau Monde Graphite had debt of CA$55.3m, up from CA$2.02m in one year. However, because it has a cash reserve of CA$48.6m, its net debt is less, at about CA$6.73m.

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$10.5m falling due within a year, and liabilities of CA$57.5m due beyond that. Offsetting these obligations, it had cash of CA$48.6m as well as receivables valued at CA$6.56m due within 12 months. So it has liabilities totalling CA$12.9m more than its cash and near-term receivables, combined.

Given Nouveau Monde Graphite has a market capitalization of CA$188.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Caveat Emptor

Over the last twelve months Nouveau Monde Graphite produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$53m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$60m of cash over the last year. So in short it's a really risky stock. 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 4 warning signs for Nouveau Monde Graphite (3 are a bit concerning) 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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