Is S.N. Nuclearelectrica (BVB:SNN) A Risky Investment?

Warren Buffett famously said, '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. We can see that S.N. Nuclearelectrica S.A. (BVB:SNN) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for S.N. Nuclearelectrica

What Is S.N. Nuclearelectrica's Net Debt?

The image below, which you can click on for greater detail, shows that S.N. Nuclearelectrica had debt of RON98.4m at the end of June 2023, a reduction from RON187.5m over a year. But on the other hand it also has RON4.15b in cash, leading to a RON4.05b net cash position.

A Look At S.N. Nuclearelectrica's Liabilities

Zooming in on the latest balance sheet data, we can see that S.N. Nuclearelectrica had liabilities of RON836.1m due within 12 months and liabilities of RON435.0m due beyond that. Offsetting these obligations, it had cash of RON4.15b as well as receivables valued at RON526.8m due within 12 months. So it can boast RON3.40b more liquid assets than total liabilities.

It's good to see that S.N. Nuclearelectrica has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, S.N. Nuclearelectrica boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that S.N. Nuclearelectrica has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if S.N. Nuclearelectrica 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While S.N. Nuclearelectrica 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. Over the last three years, S.N. Nuclearelectrica recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case S.N. Nuclearelectrica has RON4.05b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON2.5b, being 92% of its EBIT. When it comes to S.N. Nuclearelectrica's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example S.N. Nuclearelectrica has 2 warning signs (and 1 which is significant) we think you should know about.

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.

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

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.