NSE (EPA: ALNSE) seems to use debt rather sparingly
Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies NSE SA (EPA: ALNSE) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for NSE
What is the debt of NSE?
As you can see below, at the end of June 2021, NSE had a debt of 8.93 million euros, up from 8.01 million euros a year ago. Click on the image for more details. However, it has € 10.8 million in cash offsetting this, leading to net cash of € 1.84 million.
Is NSE’s track record healthy?
It can be seen from the most recent balance sheet that NSE had debts of € 28.3m maturing within one year, and debts of € 8.06m maturing beyond. In return, he had € 10.8 million in cash and € 28.5 million in receivables due within 12 months. So he actually has 2.89 million euros Following liquid assets as total liabilities.
This surplus suggests that NSE has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that NSE has more cash than debt is arguably a good indication that it can manage its debt safely.
Also positive, NSE has increased its EBIT by 21% over the past year, which should make it easier to repay debt going forward. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether NSE can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. NSE may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, NSE has recorded free cash flow totaling 91% of its EBIT, which is higher than what we normally expect. This positions it well to repay debt if it is desirable.
While we sympathize with investors who find debt worrying, you should keep in mind that NSE has net cash of $ 1.84 million, as well as more liquid assets than liabilities. And he impressed us with free cash flow of € 3.5m, or 91% of his EBIT. So, is NSE debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that NSE shows 1 warning sign in our investment analysis , you must know…
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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