S.N. Nuclearelectrica (BVB:SNN) Seems To Use Debt Rather Sparingly

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 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. Importantly, S.N. Nuclearelectrica S.A. (BVB:SNN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?

The image below, which you can click on for greater detail, shows that S.N. Nuclearelectrica had debt of RON187.5m at the end of June 2022, a reduction from RON405.4m over a year. But on the other hand it also has RON3.20b in cash, leading to a RON3.01b net cash position.

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

The latest balance sheet data shows that S.N. Nuclearelectrica had liabilities of RON650.4m due within a year, and liabilities of RON561.2m falling due after that. Offsetting these obligations, it had cash of RON3.20b as well as receivables valued at RON305.7m due within 12 months. So it actually has RON2.29b 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. Because it has plenty of assets, it is unlikely to have trouble 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 155% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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 RON3.01b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON2.1b, being 106% of its EBIT. The bottom line is that we do not find S.N. Nuclearelectrica's debt levels at all concerning. 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. We've identified 2 warning signs with S.N. Nuclearelectrica (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.