S.N. Nuclearelectrica (BVB:SNN) Has A Rock Solid Balance Sheet

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. We note that S.N. Nuclearelectrica S.A. (BVB:SNN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 RON130.3m of debt in December 2022, down from RON298.3m, one year before. However, its balance sheet shows it holds RON4.65b in cash, so it actually has RON4.52b net cash.

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 RON805.5m due within 12 months and liabilities of RON488.1m due beyond that. Offsetting this, it had RON4.65b in cash and RON438.5m in receivables that were due within 12 months. So it actually has RON3.80b more liquid assets than total liabilities.

This surplus suggests that S.N. Nuclearelectrica is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that S.N. Nuclearelectrica has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, S.N. Nuclearelectrica grew its EBIT by 150% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 recorded free cash flow worth a fulsome 88% 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 RON4.52b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON2.1b, being 88% of its EBIT. The bottom line is that S.N. Nuclearelectrica's use of debt is absolutely fine. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for S.N. Nuclearelectrica (of which 1 doesn't sit too well with us!) 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.