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 NSE S.A. (EPA:ALNSE) makes use of debt. But the real question is whether this debt is making the company risky.
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
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What Is NSE's Debt?
As you can see below, at the end of June 2021, NSE had €8.93m of debt, up from €8.01m a year ago. Click the image for more detail. However, it does have €10.8m in cash offsetting this, leading to net cash of €1.84m.
How Healthy Is NSE's Balance Sheet?
We can see from the most recent balance sheet that NSE had liabilities of €28.3m falling due within a year, and liabilities of €8.06m due beyond that. Offsetting this, it had €10.8m in cash and €28.5m in receivables that were due within 12 months. So it actually has €2.89m more liquid assets than total liabilities.
This surplus suggests that NSE has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NSE has more cash than debt is arguably a good indication that it can manage its debt safely.
Also positive, NSE grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, 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 NSE 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NSE may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, NSE recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that NSE has net cash of €1.84m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €3.5m, being 91% of its EBIT. So is NSE's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NSE is showing 1 warning sign in our investment analysis , 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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Access Free AnalysisThis 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.
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About ENXTPA:ALNSE
NSE
Designs, builds, and sells integrated systems for defense, aeronautics, transport and industry, and consumer, professional, and retail industries in France and internationally.
Flawless balance sheet and good value.