Does Nouveau Monde Graphite (CVE:NOU) Have A Healthy Balance Sheet?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nouveau Monde Graphite Inc. (CVE:NOU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Nouveau Monde Graphite
What Is Nouveau Monde Graphite's Debt?
As you can see below, Nouveau Monde Graphite had CA$16.7m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have CA$81.3m in cash offsetting this, leading to net cash of CA$64.6m.
How Strong Is Nouveau Monde Graphite's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Nouveau Monde Graphite had liabilities of CA$16.1m due within 12 months and liabilities of CA$19.4m due beyond that. Offsetting these obligations, it had cash of CA$81.3m as well as receivables valued at CA$9.69m due within 12 months. So it can boast CA$55.5m more liquid assets than total liabilities.
This surplus suggests that Nouveau Monde Graphite has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nouveau Monde Graphite 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 Nouveau Monde Graphite'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.
Since Nouveau Monde Graphite has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
So How Risky Is Nouveau Monde Graphite?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Nouveau Monde Graphite lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$57m and booked a CA$37m accounting loss. With only CA$64.6m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Nouveau Monde Graphite you should be aware of, and 4 of them are a bit unpleasant.
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.
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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.