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Health Check: How Prudently Does NexGen Energy (TSE:NXE) Use Debt?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 NexGen Energy Ltd. (TSE:NXE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NexGen Energy

What Is NexGen Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 NexGen Energy had CA$90.4m of debt, an increase on CA$55.9m, over one year. But on the other hand it also has CA$195.9m in cash, leading to a CA$105.5m net cash position.

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

A Look At NexGen Energy's Liabilities

We can see from the most recent balance sheet that NexGen Energy had liabilities of CA$16.0m falling due within a year, and liabilities of CA$94.9m due beyond that. Offsetting this, it had CA$195.9m in cash and CA$864.0k in receivables that were due within 12 months. So it actually has CA$85.9m more liquid assets than total liabilities.

This short term liquidity is a sign that NexGen Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NexGen Energy 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 ultimately the future profitability of the business will decide if NexGen Energy 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.

Given its lack of meaningful operating revenue, NexGen Energy shareholders no doubt hope it can fund itself until it can sell some combustibles.

So How Risky Is NexGen Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NexGen Energy had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$67m of cash and made a loss of CA$79m. With only CA$105.5m 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for NexGen Energy you should be aware of, and 1 of them is a bit unpleasant.

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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