Is Nouveau Monde Graphite (CVE:NOU) Using Too Much 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 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nouveau Monde Graphite

How Much Debt Does Nouveau Monde Graphite Carry?

You can click the graphic below for the historical numbers, but it shows that Nouveau Monde Graphite had CA$2.06m of debt in June 2022, down from CA$16.7m, one year before. However, its balance sheet shows it holds CA$32.1m in cash, so it actually has CA$30.1m net cash.

How Strong Is Nouveau Monde Graphite's Balance Sheet?

The latest balance sheet data shows that Nouveau Monde Graphite had liabilities of CA$15.9m due within a year, and liabilities of CA$5.41m falling due after that. On the other hand, it had cash of CA$32.1m and CA$8.12m worth of receivables due within a year. So it can boast CA$18.9m 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. 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 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.

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 the fact is that over the last twelve months Nouveau Monde Graphite lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$80m and booked a CA$50m accounting loss. With only CA$30.1m on the balance sheet, it would appear that its going to need to raise capital again 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Nouveau Monde Graphite has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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.

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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.