Does Novo Nordisk (CPH:NOVO B) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Novo Nordisk A/S (CPH:NOVO B) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Novo Nordisk

What Is Novo Nordisk's Debt?

As you can see below, Novo Nordisk had kr.21.3b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has kr.30.2b in cash to offset that, meaning it has kr.8.95b net cash.

How Healthy Is Novo Nordisk's Balance Sheet?

The latest balance sheet data shows that Novo Nordisk had liabilities of kr.169.7b due within a year, and liabilities of kr.38.3b falling due after that. Offsetting this, it had kr.30.2b in cash and kr.75.3b in receivables that were due within 12 months. So it has liabilities totalling kr.102.4b more than its cash and near-term receivables, combined.

Since publicly traded Novo Nordisk shares are worth a very impressive total of kr.3.93t, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Novo Nordisk also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Novo Nordisk grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Novo Nordisk 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Novo Nordisk may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Novo Nordisk recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Novo Nordisk has kr.8.95b in net cash. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Novo Nordisk's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Novo Nordisk , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.