Yahoo Finance Is Nostrum Oil & Gas (LON:NOG) A Risky Investment?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Nostrum Oil & Gas PLC (LON:NOG) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Nostrum Oil & Gas
How Much Debt Does Nostrum Oil & Gas Carry?
As you can see below, Nostrum Oil & Gas had US$1.13b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. On the flip side, it has US$120.8m in cash leading to net debt of about US$1.01b.
How Healthy Is Nostrum Oil & Gas's Balance Sheet?
The latest balance sheet data shows that Nostrum Oil & Gas had liabilities of US$114.5m due within a year, and liabilities of US$1.55b falling due after that. Offsetting these obligations, it had cash of US$120.8m as well as receivables valued at US$35.3m due within 12 months. So it has liabilities totalling US$1.51b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the US$27.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Nostrum Oil & Gas would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nostrum Oil & Gas can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Nostrum Oil & Gas had negative earnings before interest and tax, and actually shrunk its revenue by 3.7%, to US$373m. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Nostrum Oil & Gas produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$5.5m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost US$113m in the last year. So we think buying this stock is risky, like walking through a minefield with a mask on. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Nostrum Oil & Gas's profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
