NRJ Group (EPA:NRG) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies NRJ Group SA (EPA:NRG) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NRJ Group

How Much Debt Does NRJ Group Carry?

As you can see below, NRJ Group had €14.4m of debt at June 2020, down from €18.1m a year prior. But it also has €284.7m in cash to offset that, meaning it has €270.3m net cash.

A Look At NRJ Group's Liabilities

The latest balance sheet data shows that NRJ Group had liabilities of €159.5m due within a year, and liabilities of €57.6m falling due after that. Offsetting these obligations, it had cash of €284.7m as well as receivables valued at €129.8m due within 12 months. So it actually has €197.3m more liquid assets than total liabilities.

This surplus strongly suggests that NRJ Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, NRJ Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact NRJ Group's saving grace is its low debt levels, because its EBIT has tanked 79% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NRJ Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NRJ Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, NRJ Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that NRJ Group has net cash of €270.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in €39m. So we don't think NRJ Group's use of debt is risky. 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 instance, we've identified 2 warning signs for NRJ Group (1 doesn't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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