Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that NuEnergy Gas Limited (ASX:NGY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is NuEnergy Gas's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 NuEnergy Gas had debt of AU$5.25m, up from AU$4.66m in one year. However, it does have AU$4.89m in cash offsetting this, leading to net debt of about AU$356.0k.

A Look At NuEnergy Gas' Liabilities

According to the balance sheet data, NuEnergy Gas had liabilities of AU$17.3m due within 12 months, but no longer term liabilities. On the other hand, it had cash of AU$4.89m and AU$507.3k worth of receivables due within a year. So it has liabilities totalling AU$11.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since NuEnergy Gas has a market capitalization of AU$30.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, NuEnergy Gas has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is NuEnergy Gas's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend .

See our latest analysis for NuEnergy Gas

Given its lack of meaningful operating revenue, NuEnergy Gas shareholders no doubt hope it can fund itself until it can sell some combustibles.

Caveat Emptor

Importantly, NuEnergy Gas had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost AU$576k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$1.9m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NuEnergy Gas is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.