Is Nel (OB:NEL) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Nel ASA (OB:NEL) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nel

How Much Debt Does Nel Carry?

As you can see below, at the end of June 2021, Nel had kr101.4m of debt, up from kr32.7m a year ago. Click the image for more detail. But it also has kr3.07b in cash to offset that, meaning it has kr2.97b net cash.

How Strong Is Nel's Balance Sheet?

The latest balance sheet data shows that Nel had liabilities of kr540.0m due within a year, and liabilities of kr240.2m falling due after that. Offsetting this, it had kr3.07b in cash and kr296.8m in receivables that were due within 12 months. So it can boast kr2.59b more liquid assets than total liabilities.

This short term liquidity is a sign that Nel could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nel boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Nel's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nel wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to kr621m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Nel?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Nel had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through kr725m of cash and made a loss of kr222m. But the saving grace is the kr2.97b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with Nel .

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.

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.

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