Is NSL (SGX:N02) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that NSL Ltd (SGX:N02) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NSL

What Is NSL's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 NSL had debt of S$33.8m, up from S$31.1m in one year. However, it does have S$274.5m in cash offsetting this, leading to net cash of S$240.6m.

How Healthy Is NSL's Balance Sheet?

The latest balance sheet data shows that NSL had liabilities of S$121.6m due within a year, and liabilities of S$47.5m falling due after that. Offsetting these obligations, it had cash of S$274.5m as well as receivables valued at S$86.0m due within 12 months. So it actually has S$191.4m more liquid assets than total liabilities.

This surplus strongly suggests that NSL has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, NSL boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is NSL's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, NSL reported revenue of S$272m, which is a gain of 9.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is NSL?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months NSL lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of S$2.0m and booked a S$36m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of S$240.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with NSL (at least 1 which can't be ignored) , 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.

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This article by Simply Wall St is general in nature. 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.
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