Health Check: How Prudently Does NKT (CPH:NKT) Use Debt?

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

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NKT

What Is NKT's Net Debt?

As you can see below, NKT had €163.7m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has €200.5m in cash to offset that, meaning it has €36.8m net cash.

How Strong Is NKT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NKT had liabilities of €1.06b due within 12 months and liabilities of €330.7m due beyond that. Offsetting these obligations, it had cash of €200.5m as well as receivables valued at €585.6m due within 12 months. So its liabilities total €607.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since NKT has a market capitalization of €1.51b, 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, NKT 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 it is future earnings, more than anything, that will determine NKT's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, NKT reported revenue of €1.9b, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NKT?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NKT had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €20m and booked a €4.0m accounting loss. With only €36.8m on the balance sheet, it would appear that its going to need to raise capital again soon. NKT'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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how NKT's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.