Would Nordex (ETR:NDX1) Be Better Off With Less Debt?

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.' 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. We note that Nordex SE (ETR:NDX1) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nordex

How Much Debt Does Nordex Carry?

As you can see below, Nordex had €573.0m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have €513.2m in cash offsetting this, leading to net debt of about €59.9m.

How Healthy Is Nordex's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nordex had liabilities of €2.51b due within 12 months and liabilities of €901.8m due beyond that. Offsetting this, it had €513.2m in cash and €1.09b in receivables that were due within 12 months. So it has liabilities totalling €1.81b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €2.43b, so it does suggest shareholders should keep an eye on Nordex's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to €5.3b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Nordex still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €284m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €386m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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