Health Check: How Prudently Does Norwegian Air Shuttle (OB:NAS) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Norwegian Air Shuttle ASA (OB:NAS) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Norwegian Air Shuttle

How Much Debt Does Norwegian Air Shuttle Carry?

As you can see below, Norwegian Air Shuttle had kr4.25b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr7.76b in cash offsetting this, leading to net cash of kr3.51b.

How Strong Is Norwegian Air Shuttle's Balance Sheet?

We can see from the most recent balance sheet that Norwegian Air Shuttle had liabilities of kr7.62b falling due within a year, and liabilities of kr10.8b due beyond that. On the other hand, it had cash of kr7.76b and kr2.18b worth of receivables due within a year. So it has liabilities totalling kr8.52b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr11.3b, so it does suggest shareholders should keep an eye on Norwegian Air Shuttle's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Norwegian Air Shuttle also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

Over 12 months, Norwegian Air Shuttle reported revenue of kr18b, which is a gain of 257%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Norwegian Air Shuttle?

While Norwegian Air Shuttle lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of kr920m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Norwegian Air Shuttle shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Norwegian Air Shuttle 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.