Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Norwegian Cruise Line Holdings’s Net Debt?
The chart below, which you can click on for greater detail, shows that Norwegian Cruise Line Holdings had US$13.1b in debt in June 2023; about the same as the year before. However, it also had US$899.1m in cash, and so its net debt is US$12.2b.
A Look At Norwegian Cruise Line Holdings’ Liabilities
The latest balance sheet data shows that Norwegian Cruise Line Holdings had liabilities of US$5.82b due within a year, and liabilities of US$12.8b falling due after that. On the other hand, it had cash of US$899.1m and US$219.1m worth of receivables due within a year. So its liabilities total US$17.5b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$6.98b company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt. At the end of the day, Norwegian Cruise Line Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Norwegian Cruise Line Holdings’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Norwegian Cruise Line Holdings reported revenue of US$7.2b, which is a gain of 205%, although it did not report any earnings before interest and tax. That’s virtually the hole-in-one of revenue growth!
Despite the top line growth, Norwegian Cruise Line Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$183m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$576m in cash over the last twelve months, and it doesn’t have much by way of liquid assets. So we consider this a high risk stock and we wouldn’t be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 1 warning sign for Norwegian Cruise Line Holdings that you should be aware of.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
What are the risks and opportunities for Norwegian Cruise Line Holdings?
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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.
Read More: Is Norwegian Cruise Line Holdings (NYSE:NCLH) A Risky Investment?