David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that NSC Group SA (EPA:ALNSC) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for NSC Groupe
What is NSC Groupe’s debt?
The graph below, which you can click on for more details, shows that NSC Groupe had a debt of €18.8m in December 2021; about the same as the previous year. However, he also had €16.6 million in cash, so his net debt is €2.27 million.
A look at the liabilities of NSC Groupe
The latest balance sheet data shows that NSC Groupe had liabilities of 26.4 million euros at less than one year and liabilities of 20.5 million euros at later maturity. In return, it had €16.6 million in cash and €11.0 million in receivables due within 12 months. It therefore has liabilities totaling 19.3 million euros more than its cash and short-term receivables combined.
That’s a mountain of leverage compared to its market capitalization of €22.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. The balance sheet is clearly the area to focus on when analyzing debt. But it is the results of NSC Groupe that will influence the holding of the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, NSC Groupe achieved a turnover of 49 M€, a gain of 57%, although it did not publish a result before interest and taxes. The shareholders probably have their fingers crossed that she can make a profit.
While we can certainly appreciate NSC Groupe’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Indeed, it lost €688k at the EBIT level. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. On the positive side, we note that last twelve months EBIT is worse than free cash flow of €2.9 million and profit of €740,000. So if we focus on these metrics, there seems to be a chance that the company will manage its debt without too much trouble. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, NSC Group has 3 warning signs (and 1 which is potentially serious) that we think you should know about.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.