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- CEO of Berkshire Hathaway
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, NexGen Energy Ltd. (TSE:NXE) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does NexGen Energy Carry?
The image below, which you can click on for greater detail, shows that NexGen Energy had debt of CA$73.6m at the end of September 2021, a reduction from CA$177.0m over a year. But it also has CA$237.7m in cash to offset that, meaning it has CA$164.1m net cash.
How Strong Is NexGen Energy's Balance Sheet?
We can see from the most recent balance sheet that NexGen Energy had liabilities of CA$15.0m falling due within a year, and liabilities of CA$79.0m due beyond that. Offsetting these obligations, it had cash of CA$237.7m as well as receivables valued at CA$665.0k due within 12 months. So it can boast CA$144.4m more liquid assets than total liabilities.
This short term liquidity is a sign that NexGen Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NexGen Energy boasts net cash, so it's fair to say it does not have a heavy debt load! 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 NexGen Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Given its lack of meaningful operating revenue, NexGen Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.
So How Risky Is NexGen Energy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NexGen Energy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$38m of cash and made a loss of CA$163m. With only CA$164.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 4 warning signs for NexGen Energy (1 is a bit unpleasant) you should be aware of.
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.
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.
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