Is Novo Nordisk (CPH:NOVO B) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Novo Nordisk A/S (CPH:NOVO B) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Novo Nordisk

How Much Debt Does Novo Nordisk Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Novo Nordisk had kr.57.0b of debt, an increase on kr.26.5b, over one year. However, it does have kr.74.9b in cash offsetting this, leading to net cash of kr.17.9b.

How Strong Is Novo Nordisk's Balance Sheet?

According to the last reported balance sheet, Novo Nordisk had liabilities of kr.208.4b due within 12 months, and liabilities of kr.68.6b due beyond 12 months. Offsetting these obligations, it had cash of kr.74.9b as well as receivables valued at kr.79.6b due within 12 months. So it has liabilities totalling kr.122.4b more than its cash and near-term receivables, combined.

Since publicly traded Novo Nordisk shares are worth a very impressive total of kr.2.61t, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Novo Nordisk boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Novo Nordisk grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 Novo Nordisk's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Novo Nordisk may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Novo Nordisk produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Novo Nordisk has kr.17.9b in net cash. And we liked the look of last year's 34% year-on-year EBIT growth. So we don't think Novo Nordisk's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Novo Nordisk (1 shouldn't be ignored) you should be aware of.

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.

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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.