NCC (STO:NCC B) Has Debt But No Earnings; Should You Worry?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that NCC AB (publ) (STO:NCC B) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for NCC
How Much Debt Does NCC Carry?
The chart below, which you can click on for greater detail, shows that NCC had kr3.29b in debt in June 2019; about the same as the year before. On the flip side, it has kr987.0m in cash leading to net debt of about kr2.30b.
How Healthy Is NCC's Balance Sheet?
We can see from the most recent balance sheet that NCC had liabilities of kr20.5b falling due within a year, and liabilities of kr7.53b due beyond that. On the other hand, it had cash of kr987.0m and kr12.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr14.4b.
This is a mountain of leverage relative to its market capitalization of kr15.9b. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 NCC 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.
In the last year NCC managed to grow its revenue by 6.5%, to kr58b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, NCC had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost kr764m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through kr141m of cash over the last year. So suffice it to say we do consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting NCC insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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