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. We note that NSC Groupe SA (EPA:ALNSC) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is NSC Groupe's Debt?
As you can see below, NSC Groupe had €11.7m of debt at December 2018, down from €13.4m a year prior. However, its balance sheet shows it holds €27.4m in cash, so it actually has €15.6m net cash.
How Healthy Is NSC Groupe's Balance Sheet?
The latest balance sheet data shows that NSC Groupe had liabilities of €37.1m due within a year, and liabilities of €13.6m falling due after that. Offsetting this, it had €27.4m in cash and €25.1m in receivables that were due within 12 months. So it can boast €1.73m more liquid assets than total liabilities.
This surplus suggests that NSC Groupe has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NSC Groupe boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that NSC Groupe saw its EBIT decline by 7.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is NSC Groupe'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NSC Groupe 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. Over the last three years, NSC Groupe saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that NSC Groupe has net cash of €16m, as well as more liquid assets than liabilities. So we don't have any problem with NSC Groupe's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in NSC Groupe, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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