Is NN (NASDAQ:NNBR) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that NN, Inc. (NASDAQ:NNBR) does use debt in its business. 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 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.

Check out our latest analysis for NN

How Much Debt Does NN Carry?

The image below, which you can click on for greater detail, shows that NN had debt of US$119.5m at the end of September 2024, a reduction from US$152.6m over a year. However, it does have US$12.4m in cash offsetting this, leading to net debt of about US$107.0m.

How Strong Is NN's Balance Sheet?

We can see from the most recent balance sheet that NN had liabilities of US$88.6m falling due within a year, and liabilities of US$191.9m due beyond that. Offsetting these obligations, it had cash of US$12.4m as well as receivables valued at US$77.4m due within 12 months. So its liabilities total US$190.6m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$137.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NN 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.

In the last year NN had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to US$470m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months NN produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$18m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$9.7m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for NN 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.

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.