These 4 Measures Indicate That Norwegian Air Shuttle (OB:NAS) Is Using Debt Extensively

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Norwegian Air Shuttle ASA (OB:NAS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Norwegian Air Shuttle

What Is Norwegian Air Shuttle's Debt?

As you can see below, Norwegian Air Shuttle had kr4.06b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has kr9.35b in cash, leading to a kr5.29b net cash position.

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 kr12.6b due within 12 months and liabilities of kr14.0b due beyond that. On the other hand, it had cash of kr9.35b and kr4.32b worth of receivables due within a year. So its liabilities total kr12.9b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr7.58b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Norwegian Air Shuttle would likely require a major re-capitalisation if it had to pay its creditors today. 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.

We also note that Norwegian Air Shuttle improved its EBIT from a last year's loss to a positive kr719m. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Norwegian Air Shuttle has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Norwegian Air Shuttle actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Norwegian Air Shuttle's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr5.29b. The cherry on top was that in converted 545% of that EBIT to free cash flow, bringing in kr3.9b. So while Norwegian Air Shuttle does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Norwegian Air Shuttle .

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.