Dampskibsselskabet Norden (CPH:DNORD) Could Easily Take On More Debt

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.' 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. We can see that Dampskibsselskabet Norden A/S (CPH:DNORD) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dampskibsselskabet Norden

What Is Dampskibsselskabet Norden's Net Debt?

As you can see below, Dampskibsselskabet Norden had US$189.8m of debt at December 2022, down from US$454.6m a year prior. But it also has US$842.3m in cash to offset that, meaning it has US$652.5m net cash.

A Look At Dampskibsselskabet Norden's Liabilities

The latest balance sheet data shows that Dampskibsselskabet Norden had liabilities of US$907.1m due within a year, and liabilities of US$517.6m falling due after that. Offsetting this, it had US$842.3m in cash and US$453.8m in receivables that were due within 12 months. So its liabilities total US$128.6m more than the combination of its cash and short-term receivables.

Since publicly traded Dampskibsselskabet Norden shares are worth a total of US$2.05b, 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. While it does have liabilities worth noting, Dampskibsselskabet Norden also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Dampskibsselskabet Norden grew its EBIT by 186% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dampskibsselskabet Norden's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dampskibsselskabet Norden 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. Happily for any shareholders, Dampskibsselskabet Norden actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dampskibsselskabet Norden has US$652.5m in net cash. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in US$1.0b. So is Dampskibsselskabet Norden's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Dampskibsselskabet Norden is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.