Is Nordex (ETR:NDX1) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Nordex SE (ETR:NDX1) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nordex

What Is Nordex's Net Debt?

The image below, which you can click on for greater detail, shows that Nordex had debt of €358.4m at the end of September 2021, a reduction from €900.3m over a year. But it also has €890.5m in cash to offset that, meaning it has €532.1m net cash.

How Healthy Is Nordex's Balance Sheet?

We can see from the most recent balance sheet that Nordex had liabilities of €2.35b falling due within a year, and liabilities of €692.3m due beyond that. Offsetting these obligations, it had cash of €890.5m as well as receivables valued at €920.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.24b.

While this might seem like a lot, it is not so bad since Nordex has a market capitalization of €2.12b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nordex wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to €5.4b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Nordex?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Nordex lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €111m of cash and made a loss of €126m. But the saving grace is the €532.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. Pre-profit companies are often risky, but they can also offer great 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. For example, we've discovered 2 warning signs for Nordex that you should be aware of before investing here.

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.