Here's Why Norwegian Air Shuttle (OB:NAS) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Norwegian Air Shuttle

How Much Debt Does Norwegian Air Shuttle Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Norwegian Air Shuttle had kr4.60b of debt, an increase on kr3.62b, over one year. However, its balance sheet shows it holds kr11.5b in cash, so it actually has kr6.85b net cash.

A Look At Norwegian Air Shuttle's Liabilities

The latest balance sheet data shows that Norwegian Air Shuttle had liabilities of kr14.3b due within a year, and liabilities of kr16.1b falling due after that. Offsetting this, it had kr11.5b in cash and kr4.05b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr14.9b.

Given this deficit is actually higher than the company's market capitalization of kr10.8b, we think shareholders really should watch Norwegian Air Shuttle's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Norwegian Air Shuttle has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Also relevant is that Norwegian Air Shuttle has grown its EBIT by a very respectable 25% in the last year, thus enhancing its ability to pay down debt. 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 Norwegian Air Shuttle'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Norwegian Air Shuttle may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Norwegian Air Shuttle actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 kr6.85b. The cherry on top was that in converted 246% of that EBIT to free cash flow, bringing in kr6.3b. So we are not troubled with Norwegian Air Shuttle's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Norwegian Air Shuttle insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.