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.’ 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?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Norwegian Air Shuttle’s Debt?
As you can see below, Norwegian Air Shuttle had kr27.2b of debt at June 2020, down from kr28.9b a year prior. However, it also had kr4.98b in cash, and so its net debt is kr22.2b.
A Look At Norwegian Air Shuttle’s Liabilities
According to the last reported balance sheet, Norwegian Air Shuttle had liabilities of kr20.4b due within 12 months, and liabilities of kr51.4b due beyond 12 months. Offsetting these obligations, it had cash of kr4.98b as well as receivables valued at kr7.05b due within 12 months. So it has liabilities totalling kr59.7b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the kr2.19b company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. After all, Norwegian Air Shuttle would likely require a major re-capitalisation if it had to pay its creditors today. 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’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Norwegian Air Shuttle had a loss before interest and tax, and actually shrunk its revenue by 29%, to kr30b. That makes us nervous, to say the least.
While Norwegian Air Shuttle’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr3.3b at the EBIT level. Reflecting on this and the significant total liabilities, it’s hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost kr5.6b in the last year. So we think buying this stock is risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example – Norwegian Air Shuttle has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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. 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.
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