These 4 Measures Indicate That S.N. Nuclearelectrica (BVB:SNN) Is Using Debt Safely

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. We note that S.N. Nuclearelectrica S.A. (BVB:SNN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out 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 RON130.3m at the end of December 2022, a reduction from RON298.3m over a year. However, it does have RON4.54b in cash offsetting this, leading to net cash of RON4.41b.

How Strong 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 RON803.4m due within 12 months and liabilities of RON456.8m due beyond that. Offsetting this, it had RON4.54b in cash and RON559.7m in receivables that were due within 12 months. So it can boast RON3.84b 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. Because it has plenty of assets, it is unlikely to have trouble 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!

Even more impressive was the fact that S.N. Nuclearelectrica grew its EBIT by 154% over twelve months. That boost will make it even easier to pay down debt going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. S.N. Nuclearelectrica may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, S.N. Nuclearelectrica generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case S.N. Nuclearelectrica has RON4.41b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in RON2.6b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for S.N. Nuclearelectrica (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.