Is Nouveau Monde Graphite (CVE:NOU) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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, at the end of March 2023, Nouveau Monde Graphite had CA$70.0m of debt, up from CA$2.09m a year ago. Click the image for more detail. On the flip side, it has CA$48.8m in cash leading to net debt of about CA$21.2m.

How Strong Is Nouveau Monde Graphite's Balance Sheet?

The latest balance sheet data shows that Nouveau Monde Graphite had liabilities of CA$14.7m due within a year, and liabilities of CA$72.9m falling due after that. On the other hand, it had cash of CA$48.8m and CA$7.88m worth of receivables due within a year. So its liabilities total CA$30.9m more than the combination of its cash and short-term receivables.

Since publicly traded Nouveau Monde Graphite shares are worth a total of CA$255.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change 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 Nouveau Monde Graphite 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.

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

Caveat Emptor

Importantly, Nouveau Monde Graphite had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$53m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$66m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Nouveau Monde Graphite (of which 3 are a bit concerning!) you should know about.

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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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.