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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the XX Airlines industry.

What Is Norwegian Air Shuttle's Debt?

You can click the graphic below for the historical numbers, but it shows that Norwegian Air Shuttle had kr4.18b of debt in June 2022, down from kr5.22b, one year before. However, its balance sheet shows it holds kr7.54b in cash, so it actually has kr3.36b net cash.

How Healthy 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 kr9.86b due within 12 months and liabilities of kr10.6b due beyond that. Offsetting this, it had kr7.54b in cash and kr4.33b in receivables that were due within 12 months. So it has liabilities totalling kr8.62b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr6.81b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Norwegian Air Shuttle can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Norwegian Air Shuttle wasn't profitable at an EBIT level, but managed to grow its revenue by 342%, to kr11b. That's virtually the hole-in-one of revenue growth!

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 kr464m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive was the revenue growth of 342% over the last year. But we genuinely do think the balance sheet is a risky. 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. We've identified 1 warning sign with Norwegian Air Shuttle , and understanding them should be part of your investment process.

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.