S.N. Nuclearelectrica (BVB:SNN) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies S.N. Nuclearelectrica S.A. (BVB:SNN) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Debt?

You can click the graphic below for the historical numbers, but it shows that S.N. Nuclearelectrica had RON298.3m of debt in December 2021, down from RON502.5m, one year before. But on the other hand it also has RON2.67b in cash, leading to a RON2.37b net cash position.

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

Zooming in on the latest balance sheet data, we can see that S.N. Nuclearelectrica had liabilities of RON662.8m due within 12 months and liabilities of RON597.6m due beyond that. On the other hand, it had cash of RON2.67b and RON285.0m worth of receivables due within a year. So it can boast RON1.70b 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!

In addition to that, we're happy to report that S.N. Nuclearelectrica has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. 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 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. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that S.N. Nuclearelectrica has net cash of RON2.37b, as well as more liquid assets than liabilities. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in RON1.2b. When it comes to S.N. Nuclearelectrica's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for S.N. Nuclearelectrica that you should be aware of.

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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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.