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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nick Scali Limited (ASX:NCK) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Nick Scali
What Is Nick Scali's Debt?
The chart below, which you can click on for greater detail, shows that Nick Scali had AU$33.7m in debt in December 2020; about the same as the year before. But it also has AU$87.6m in cash to offset that, meaning it has AU$54.0m net cash.
How Healthy Is Nick Scali's Balance Sheet?
According to the last reported balance sheet, Nick Scali had liabilities of AU$120.5m due within 12 months, and liabilities of AU$189.2m due beyond 12 months. Offsetting these obligations, it had cash of AU$87.6m as well as receivables valued at AU$1.18m due within 12 months. So its liabilities total AU$220.9m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Nick Scali has a market capitalization of AU$846.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Nick Scali boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Nick Scali grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nick Scali'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.