Is Norwegian Air Shuttle (OB:NAS) Weighed On By Its Debt Load?

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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Norwegian Air Shuttle

What Is Norwegian Air Shuttle's Net Debt?

As you can see below, Norwegian Air Shuttle had kr5.22b of debt at June 2021, down from kr27.2b a year prior. However, it does have kr7.48b in cash offsetting this, leading to net cash of kr2.25b.

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 kr5.78b due within 12 months and liabilities of kr10.3b due beyond that. Offsetting these obligations, it had cash of kr7.48b as well as receivables valued at kr2.53b due within 12 months. So it has liabilities totalling kr6.10b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of kr9.55b, so it does suggest shareholders should keep an eye on Norwegian Air Shuttle's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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. 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 92%, to kr2.5b. To be frank that doesn't bode well.

So How Risky Is Norwegian Air Shuttle?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Norwegian Air Shuttle had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr2.5b and booked a kr16b accounting loss. With only kr2.25b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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.

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.

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