NSC Groupe (EPA:ALNSC) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that NSC Groupe SA (EPA:ALNSC) does have debt on its balance sheet. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for NSC Groupe

How Much Debt Does NSC Groupe Carry?

As you can see below, at the end of December 2020, NSC Groupe had €19.2m of debt, up from €14.7m a year ago. Click the image for more detail. However, it does have €15.3m in cash offsetting this, leading to net debt of about €3.92m.

A Look At NSC Groupe's Liabilities

Zooming in on the latest balance sheet data, we can see that NSC Groupe had liabilities of €27.5m due within 12 months and liabilities of €16.6m due beyond that. Offsetting these obligations, it had cash of €15.3m as well as receivables valued at €9.97m due within 12 months. So it has liabilities totalling €18.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €23.1m, so it does suggest shareholders should keep an eye on NSC Groupe's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is NSC Groupe's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, NSC Groupe made a loss at the EBIT level, and saw its revenue drop to €31m, which is a fall of 65%. To be frank that doesn't bode well.

Caveat Emptor

While NSC Groupe's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €13m. 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. Another cause for caution is that is bled €5.6m in negative free cash flow over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with NSC Groupe (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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