Dampskibsselskabet Norden (CPH:DNORD) Seems To Use Debt Rather Sparingly

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. We can see that Dampskibsselskabet Norden A/S (CPH:DNORD) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Dampskibsselskabet Norden

How Much Debt Does Dampskibsselskabet Norden Carry?

As you can see below, Dampskibsselskabet Norden had US$393.1m of debt at June 2022, down from US$567.0m a year prior. However, it does have US$566.5m in cash offsetting this, leading to net cash of US$173.4m.

A Look At Dampskibsselskabet Norden's Liabilities

We can see from the most recent balance sheet that Dampskibsselskabet Norden had liabilities of US$954.6m falling due within a year, and liabilities of US$620.8m due beyond that. On the other hand, it had cash of US$566.5m and US$477.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$531.7m.

Dampskibsselskabet Norden has a market capitalization of US$1.66b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 397% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Dampskibsselskabet Norden'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Dampskibsselskabet Norden has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Dampskibsselskabet Norden actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Dampskibsselskabet Norden does have more liabilities than liquid assets, it also has net cash of US$173.4m. And it impressed us with free cash flow of US$658m, being 120% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Dampskibsselskabet Norden , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.