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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Nordex SE (ETR:NDX1) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nordex

What Is Nordex's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nordex had €386.0m of debt in June 2022, down from €572.3m, one year before. However, its balance sheet shows it holds €660.4m in cash, so it actually has €274.4m net cash.

How Healthy Is Nordex's Balance Sheet?

The latest balance sheet data shows that Nordex had liabilities of €3.23b due within a year, and liabilities of €406.9m falling due after that. On the other hand, it had cash of €660.4m and €980.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.00b.

When you consider that this deficiency exceeds the company's €1.58b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Nordex has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to €4.9b. That's not what we would hope to see.

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 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 €331m of cash and made a loss of €450m. But the saving grace is the €274.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 2 warning signs with Nordex , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.