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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Nouveau Monde Graphite Inc. (CVE:NOU) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nouveau Monde Graphite

What Is Nouveau Monde Graphite's Debt?

As you can see below, at the end of June 2023, Nouveau Monde Graphite had CA$53.5m of debt, up from CA$2.06m a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$59.8m in cash, so it actually has CA$6.33m net cash.

How Strong Is Nouveau Monde Graphite's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nouveau Monde Graphite had liabilities of CA$9.18m due within 12 months and liabilities of CA$55.9m due beyond that. Offsetting these obligations, it had cash of CA$59.8m as well as receivables valued at CA$6.44m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Nouveau Monde Graphite's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$207.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Nouveau Monde Graphite has more cash than debt is arguably a good indication that it can manage its debt safely. 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 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 in the last year Nouveau Monde Graphite had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$67m and booked a CA$41m accounting loss. Given it only has net cash of CA$6.33m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 4 warning signs for Nouveau Monde Graphite (3 are potentially serious) you should be aware of.

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.