Does Norwegian Air Shuttle (OB:NAS) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Norwegian Air Shuttle ASA (OB:NAS) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Norwegian Air Shuttle

How Much Debt Does Norwegian Air Shuttle Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Norwegian Air Shuttle had debt of kr4.54b, up from kr4.06b in one year. But on the other hand it also has kr11.5b in cash, leading to a kr6.95b net cash position.

A Look At Norwegian Air Shuttle's Liabilities

The latest balance sheet data shows that Norwegian Air Shuttle had liabilities of kr15.3b due within a year, and liabilities of kr18.6b falling due after that. Offsetting these obligations, it had cash of kr11.5b as well as receivables valued at kr5.61b due within 12 months. So its liabilities total kr16.8b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr10.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Norwegian Air Shuttle would probably need a major re-capitalization if its creditors were to demand repayment. Norwegian Air Shuttle boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, Norwegian Air Shuttle's EBIT launched higher than Elon Musk, gaining a whopping 229% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Norwegian Air Shuttle'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Norwegian Air Shuttle has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Norwegian Air Shuttle actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Norwegian Air Shuttle's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr6.95b. And it impressed us with free cash flow of kr6.7b, being 343% of its EBIT. So we are not troubled with Norwegian Air Shuttle's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Norwegian Air Shuttle that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.