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

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. We note that Norwegian Air Shuttle ASA (OB:NAS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out 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 kr4.21b at the end of March 2022, a reduction from kr12.1b over a year. However, its balance sheet shows it holds kr7.53b in cash, so it actually has kr3.32b net cash.

How Strong Is Norwegian Air Shuttle's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Norwegian Air Shuttle had liabilities of kr8.08b due within 12 months and liabilities of kr9.74b due beyond that. Offsetting these obligations, it had cash of kr7.53b as well as receivables valued at kr3.42b due within 12 months. So its liabilities total kr6.87b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of kr8.19b, 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. Despite its noteworthy liabilities, Norwegian Air Shuttle boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 kr6.7b, which is a gain of 16%, 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.

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 kr2.0b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Norwegian Air Shuttle (of which 1 is a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.