Norwegian Air Shuttle (OB:NAS) Has A Pretty Healthy Balance Sheet

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. We can see that Norwegian Air Shuttle ASA (OB:NAS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

The image below, which you can click on for greater detail, shows that Norwegian Air Shuttle had debt of kr3.75b at the end of December 2023, a reduction from kr4.25b over a year. But on the other hand it also has kr9.48b in cash, leading to a kr5.73b net cash position.

A Look At Norwegian Air Shuttle's Liabilities

We can see from the most recent balance sheet that Norwegian Air Shuttle had liabilities of kr8.96b falling due within a year, and liabilities of kr15.8b due beyond that. On the other hand, it had cash of kr9.48b and kr2.31b worth of receivables due within a year. So it has liabilities totalling kr13.0b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr13.4b. 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!

We also note that Norwegian Air Shuttle improved its EBIT from a last year's loss to a positive kr2.3b. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Norwegian Air Shuttle may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Norwegian Air Shuttle actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Norwegian Air Shuttle does have more liabilities than liquid assets, it also has net cash of kr5.73b. The cherry on top was that in converted 206% of that EBIT to free cash flow, bringing in kr4.7b. So we don't have any problem with Norwegian Air Shuttle's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.