Is Nikola (NASDAQ:NKLA) Using Too Much Debt?

NASDAQ:NKLA) does carry debt. But the real question is whether this debt is making the company risky.” data-reactid=”28″>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.’ 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. Importantly, Nikola Corporation (NASDAQ:NKLA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.

View our latest analysis for Nikola ” data-reactid=”31″> View our latest analysis for Nikola

What Is Nikola’s Net Debt?

The chart below, which you can click on for greater detail, shows that Nikola had US$4.10m in debt in June 2020; about the same as the year before. But it also has US$698.4m in cash to offset that, meaning it has US$694.3m net cash.

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A Look At Nikola’s Liabilities

report showing analyst profit forecasts.” data-reactid=”52″>This short term liquidity is a sign that Nikola could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nikola has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Nikola’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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Nikola can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Nikola?

4 warning signs (and 2 which are a bit concerning) we think you should know about.” data-reactid=”55″>By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Nikola had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$101.8m and booked a US$191.8m accounting loss. Given it only has net cash of US$694.3m, the company may need to raise more capital if it doesn’t reach break-even soon. Nikola’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example – Nikola has 4 warning signs (and 2 which are a bit concerning) we think you should know about.