Is S.N. Nuclearelectrica (BVB:SNN) 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.' 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. Importantly, S.N. Nuclearelectrica S.A. (BVB:SNN) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for S.N. Nuclearelectrica

How Much Debt Does S.N. Nuclearelectrica Carry?

You can click the graphic below for the historical numbers, but it shows that S.N. Nuclearelectrica had RON405.4m of debt in June 2021, down from RON607.8m, one year before. But it also has RON1.96b in cash to offset that, meaning it has RON1.56b net cash.

How Healthy Is S.N. Nuclearelectrica's Balance Sheet?

The latest balance sheet data shows that S.N. Nuclearelectrica had liabilities of RON549.5m due within a year, and liabilities of RON614.5m falling due after that. Offsetting these obligations, it had cash of RON1.96b as well as receivables valued at RON252.2m due within 12 months. So it can boast RON1.05b more liquid assets than total liabilities.

This surplus suggests that S.N. Nuclearelectrica has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, S.N. Nuclearelectrica boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, S.N. Nuclearelectrica grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine S.N. Nuclearelectrica'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. S.N. Nuclearelectrica 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. Happily for any shareholders, S.N. Nuclearelectrica actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case S.N. Nuclearelectrica has RON1.56b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON796m, being 120% of its EBIT. The bottom line is that we do not find S.N. Nuclearelectrica's debt levels at all concerning. 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. To that end, you should be aware of the 1 warning sign we've spotted with S.N. Nuclearelectrica .

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.