Is Nel (OB:NEL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Nel ASA (OB:NEL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Nel

What Is Nel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nel had kr22.8m of debt in June 2022, down from kr28.5m, one year before. However, its balance sheet shows it holds kr3.65b in cash, so it actually has kr3.62b net cash.

How Healthy Is Nel's Balance Sheet?

We can see from the most recent balance sheet that Nel had liabilities of kr836.2m falling due within a year, and liabilities of kr264.8m due beyond that. Offsetting this, it had kr3.65b in cash and kr417.9m in receivables that were due within 12 months. So it actually has kr2.96b more liquid assets than total liabilities.

This surplus suggests that Nel has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nel has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Nel reported revenue of kr827m, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nel?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Nel had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr869m and booked a kr967m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of kr3.62b. That kitty means the company can keep spending for growth for at least two years, at current rates. Nel's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 3 warning signs for Nel 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.

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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.