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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that NRJ Group SA (EPA:NRG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for NRJ Group
What Is NRJ Group's Net Debt?
As you can see below, at the end of June 2019, NRJ Group had €18.1m of debt, up from €5.60m a year ago. Click the image for more detail. However, it does have €211.9m in cash offsetting this, leading to net cash of €193.8m.
A Look At NRJ Group's Liabilities
Zooming in on the latest balance sheet data, we can see that NRJ Group had liabilities of €171.3m due within 12 months and liabilities of €65.3m due beyond that. Offsetting this, it had €211.9m in cash and €162.5m in receivables that were due within 12 months. So it can boast €137.8m more liquid assets than total liabilities.
This excess liquidity suggests that NRJ Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, NRJ Group boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that NRJ Group's load is not too heavy, because its EBIT was down 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NRJ Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.