Is Nordex (ETR:NDX1) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Nordex SE (ETR:NDX1) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nordex

How Much Debt Does Nordex Carry?

You can click the graphic below for the historical numbers, but it shows that Nordex had €293.2m of debt in June 2023, down from €386.0m, one year before. However, it does have €652.8m in cash offsetting this, leading to net cash of €359.6m.

How Strong Is Nordex's Balance Sheet?

According to the last reported balance sheet, Nordex had liabilities of €3.14b due within 12 months, and liabilities of €658.7m due beyond 12 months. Offsetting this, it had €652.8m in cash and €1.16b in receivables that were due within 12 months. So it has liabilities totalling €2.00b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €2.69b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Nordex boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nordex 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 Nordex wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to €6.3b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Nordex?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Nordex had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €517m and booked a €513m accounting loss. But the saving grace is the €359.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Nordex'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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Nordex , 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.