Is S.N. Nuclearelectrica (BVB:SNN) Using Too Much Debt?

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 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. Importantly, S.N. Nuclearelectrica S.A. (BVB:SNN) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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?

You can click the graphic below for the historical numbers, but it shows that S.N. Nuclearelectrica had RON607.8m of debt in June 2020, down from RON807.1m, one year before. However, it does have RON1.86b in cash offsetting this, leading to net cash of RON1.25b.

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

According to the last reported balance sheet, S.N. Nuclearelectrica had liabilities of RON501.2m due within 12 months, and liabilities of RON832.4m due beyond 12 months. Offsetting this, it had RON1.86b in cash and RON159.3m in receivables that were due within 12 months. So it can boast RON683.5m more liquid assets than total liabilities.

This short term liquidity is a sign that S.N. Nuclearelectrica could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, S.N. Nuclearelectrica boasts net cash, so it's fair to say it does not have a heavy debt load!

S.N. Nuclearelectrica's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 actually produced more free cash flow than EBIT. 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 RON1.25b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in RON959m. So we don't think S.N. Nuclearelectrica's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for S.N. Nuclearelectrica (of which 1 makes us a bit uncomfortable!) you should know about.

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.

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