These 4 Measures Indicate That Norcros (LON:NXR) Is Using Debt Safely
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 note that Norcros plc (LON:NXR) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Norcros
How Much Debt Does Norcros Carry?
The image below, which you can click on for greater detail, shows that at March 2022 Norcros had debt of UK£18.8m, up from UK£17.8m in one year. However, its balance sheet shows it holds UK£27.4m in cash, so it actually has UK£8.60m net cash.
How Strong Is Norcros' Balance Sheet?
We can see from the most recent balance sheet that Norcros had liabilities of UK£110.8m falling due within a year, and liabilities of UK£48.4m due beyond that. On the other hand, it had cash of UK£27.4m and UK£67.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£64.0m.
This deficit isn't so bad because Norcros is worth UK£189.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Norcros boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Norcros has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Norcros 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. Norcros 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. Happily for any shareholders, Norcros actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While Norcros does have more liabilities than liquid assets, it also has net cash of UK£8.60m. And it impressed us with free cash flow of UK£9.2m, being 105% of its EBIT. So we don't think Norcros's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Norcros is showing 2 warning signs in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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