Stock Analysis

Is Ncondezi Energy (LON:NCCL) Using Debt In A Risky Way?

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AIM:NCCL
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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ncondezi Energy Limited (LON:NCCL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ncondezi Energy

What Is Ncondezi Energy's Net Debt?

The chart below, which you can click on for greater detail, shows that Ncondezi Energy had US$5.73m in debt in June 2022; about the same as the year before. On the flip side, it has US$436.0k in cash leading to net debt of about US$5.30m.

debt-equity-history-analysis
AIM:NCCL Debt to Equity History October 1st 2022

A Look At Ncondezi Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Ncondezi Energy had liabilities of US$6.04m due within 12 months and no liabilities due beyond that. Offsetting this, it had US$436.0k in cash and US$74.0k in receivables that were due within 12 months. So its liabilities total US$5.53m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$4.66m, we think shareholders really should watch Ncondezi Energy's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ncondezi Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, Ncondezi Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Importantly, Ncondezi Energy had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$1.7m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$1.3m in negative free cash flow over the last year. That means it's on the risky side of things. 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 3 warning signs for Ncondezi Energy that you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

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About AIM:NCCL

Ncondezi Energy

Ncondezi Energy Limited, a power development company, focuses on the phased development of thermal coal power plant and mine project in Mozambique.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance0
Financial Health3
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Mediocre balance sheet and slightly overvalued.