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These 4 Measures Indicate That NRW Holdings (ASX:NWH) Is Using Debt Safely

·4 min read

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 NRW Holdings Limited (ASX:NWH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NRW Holdings

What Is NRW Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that NRW Holdings had debt of AU$54.7m at the end of June 2022, a reduction from AU$88.5m over a year. However, it does have AU$219.3m in cash offsetting this, leading to net cash of AU$164.6m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is NRW Holdings' Balance Sheet?

The latest balance sheet data shows that NRW Holdings had liabilities of AU$556.1m due within a year, and liabilities of AU$274.5m falling due after that. On the other hand, it had cash of AU$219.3m and AU$417.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$193.7m.

Of course, NRW Holdings has a market capitalization of AU$1.11b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, NRW Holdings 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 NRW Holdings has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NRW Holdings 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. While NRW Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, NRW Holdings generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While NRW Holdings does have more liabilities than liquid assets, it also has net cash of AU$164.6m. And it impressed us with free cash flow of AU$82m, being 90% of its EBIT. So we don't think NRW Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - NRW Holdings has 1 warning sign we think you should be aware of.

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.

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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