NRC Group (OB:NRC) Is Carrying A Fair Bit Of Debt

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. Importantly, NRC Group ASA (OB:NRC) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NRC Group

What Is NRC Group's Debt?

You can click the graphic below for the historical numbers, but it shows that NRC Group had kr1.27b of debt in September 2020, down from kr1.65b, one year before. However, it also had kr606.0m in cash, and so its net debt is kr665.0m.

How Strong Is NRC Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NRC Group had liabilities of kr1.81b due within 12 months and liabilities of kr1.57b due beyond that. On the other hand, it had cash of kr606.0m and kr1.63b worth of receivables due within a year. So it has liabilities totalling kr1.15b more than its cash and near-term receivables, combined.

This deficit isn't so bad because NRC Group is worth kr2.33b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 NRC Group'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.

Over 12 months, NRC Group reported revenue of kr6.5b, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months NRC Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr47m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of kr129m. So in short it's a really risky stock. 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. Take risks, for example - NRC Group has 3 warning signs we think 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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