Does Dampskibsselskabet Norden (CPH:DNORD) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Dampskibsselskabet Norden A/S (CPH:DNORD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dampskibsselskabet Norden

How Much Debt Does Dampskibsselskabet Norden Carry?

As you can see below, Dampskibsselskabet Norden had US$210.6m of debt at June 2024, down from US$285.5m a year prior. But it also has US$283.6m in cash to offset that, meaning it has US$73.0m net cash.

How Strong Is Dampskibsselskabet Norden's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dampskibsselskabet Norden had liabilities of US$797.7m due within 12 months and liabilities of US$277.6m due beyond that. On the other hand, it had cash of US$283.6m and US$421.2m worth of receivables due within a year. So it has liabilities totalling US$370.5m more than its cash and near-term receivables, combined.

Dampskibsselskabet Norden has a market capitalization of US$1.19b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

The modesty of its debt load may become crucial for Dampskibsselskabet Norden if management cannot prevent a repeat of the 66% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dampskibsselskabet Norden will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. 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$73.0m. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in -US$40m. So we don't have any problem with Dampskibsselskabet Norden's use of debt. 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 3 warning signs with Dampskibsselskabet Norden (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.