Novo Nordisk (CPH:NOVO B) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Novo Nordisk A/S (CPH:NOVO B) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Novo Nordisk

What Is Novo Nordisk's Net Debt?

The chart below, which you can click on for greater detail, shows that Novo Nordisk had kr.26.5b in debt in September 2023; about the same as the year before. However, its balance sheet shows it holds kr.47.6b in cash, so it actually has kr.21.1b net cash.

How Strong Is Novo Nordisk's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Novo Nordisk had liabilities of kr.172.6b due within 12 months and liabilities of kr.34.6b due beyond that. Offsetting this, it had kr.47.6b in cash and kr.62.0b in receivables that were due within 12 months. So its liabilities total kr.97.6b more than the combination of its cash and short-term receivables.

Since publicly traded Novo Nordisk shares are worth a very impressive total of kr.2.98t, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Novo Nordisk boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Novo Nordisk has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. 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 Novo Nordisk 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Novo Nordisk recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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.21.1b in net cash. And it impressed us with its EBIT growth of 30% over the last year. So we don't think Novo Nordisk's use of debt is 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. For instance, we've identified 1 warning sign for Novo Nordisk that you should be aware of.

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.