Is Norwegian Air Shuttle (OB:NAS) A Risky Investment?

Warren Buffett famously said, '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. 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?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Norwegian Air Shuttle

What Is Norwegian Air Shuttle's Net Debt?

The image below, which you can click on for greater detail, shows that Norwegian Air Shuttle had debt of kr4.16b at the end of December 2021, a reduction from kr8.77b over a year. However, its balance sheet shows it holds kr7.69b in cash, so it actually has kr3.53b net cash.

A Look At Norwegian Air Shuttle's Liabilities

The latest balance sheet data shows that Norwegian Air Shuttle had liabilities of kr5.94b due within a year, and liabilities of kr9.61b falling due after that. Offsetting this, it had kr7.69b in cash and kr2.15b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr5.71b.

This deficit isn't so bad because Norwegian Air Shuttle is worth kr9.56b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Norwegian Air Shuttle can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Norwegian Air Shuttle had a loss before interest and tax, and actually shrunk its revenue by 44%, to kr5.1b. That makes us nervous, to say the least.

So How Risky Is Norwegian Air Shuttle?

Although Norwegian Air Shuttle had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of kr1.9b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 4 warning signs for Norwegian Air Shuttle you should be aware of, and 2 of them are significant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.