Nel (OB:NEL) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Nel ASA (OB:NEL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nel

How Much Debt Does Nel Carry?

As you can see below, Nel had kr22.8m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has kr3.80b in cash, leading to a kr3.78b net cash position.

How Strong Is Nel's Balance Sheet?

We can see from the most recent balance sheet that Nel had liabilities of kr1.26b falling due within a year, and liabilities of kr352.2m due beyond that. Offsetting this, it had kr3.80b in cash and kr731.1m in receivables that were due within 12 months. So it actually has kr2.91b more liquid assets than total liabilities.

This surplus suggests that Nel is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Nel has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Nel'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.

Over 12 months, Nel reported revenue of kr1.5b, which is a gain of 98%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Nel?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Nel had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr1.2b and booked a kr1.5b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of kr3.78b. 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. Be aware that Nel is showing 3 warning signs 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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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.