Legendary fund manager Li Lu (supported by Charlie Munger) once said, “The biggest investment risk is not price fluctuations, but whether you will suffer permanent capital losses.” When you check the company’s balance sheet, consider Its risks are natural, because debt is usually involved when a business fails. We can see that Nouveau Monde Graphite Inc. (CVE:NOU) does use debt in its business. But is this debt a concern for shareholders?
When companies cannot easily fulfill these obligations through free cash flow or raising funds at attractive prices, debt and other liabilities become corporate risks. Ultimately, if the company fails to meet its legal obligations to repay debts, shareholders may get nothing. However, a more frequent (but still costly) situation is that the company must issue shares at a low price to permanently dilute shareholders' equity to support its balance sheet. Of course, the advantage of debt is that it usually represents cheap capital, especially when it replaces the dilution of the company with the ability to reinvest at a high rate of return. When we consider the company's use of debt, we first consider both cash and debt.
Check out our latest analysis for Nouveau Monde Graphite
As shown below, the debt of Nouveau Monde Graphite in September 2021 was 16.7 million Canadian dollars, roughly the same as the previous year. You can click on the chart to get more detailed information. But on the other hand, it also has 81.3 million Canadian dollars in cash, resulting in a net cash position of 64.6 million Canadian dollars.
The latest balance sheet data shows that Nouveau Monde Graphite has a debt of 16.1 million Canadian dollars due within one year, and a debt of 19.4 million Canadian dollars due later. To offset this, it has 81.3 million Canadian dollars in cash and 9.69 million Canadian dollars in accounts receivable due within 12 months. Therefore, it can boast of current assets of CAD 55.5 million more than total liabilities.
This surplus indicates that Nouveau Monde Graphite's balance sheet is conservative and may eliminate debt effortlessly. In short, Nouveau Monde Graphite has net cash, so it can be said that it does not have a heavy debt burden! When analyzing debt levels, the balance sheet is the obvious starting point. But most importantly, future earnings will determine Nouveau Monde Graphite's ability to maintain a healthy balance sheet in the future. Therefore, if you want to know what professionals think, you might find this free report on analyst profit forecasts very interesting.
Given its lack of meaningful operating income, investors may hope that Nouveau Monde Graphite will find some valuable resources before the funds run out.
In essence, loss-making companies are more risky than long-term profitable companies. We did notice that Nouveau Monde Graphite had a loss before interest and taxes (EBIT) last year. During the same period, its free cash flow was negative 57 million Canadian dollars and recorded an accounting loss of 37 million Canadian dollars. Given that its net cash is only 64.6 million Canadian dollars, the company may need to raise more funds if it cannot achieve breakeven soon. Overall, its current balance sheet does not seem to be too risky, but we have always remained cautious until we see positive free cash flow. The balance sheet is obviously the area you want to focus on when analyzing debt. But in the end, every company can include risks that exist outside the balance sheet. For example, we have identified 5 warning signs for New World Graphite (4 are very important), and you should pay attention to them.
After all, if you are more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks now.
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