Here's Why Dampskibsselskabet Norden (CPH:DNORD) Can Manage Its Debt Responsibly

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.' 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?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dampskibsselskabet Norden

What Is Dampskibsselskabet Norden's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dampskibsselskabet Norden had US$275.5m of debt in September 2023, down from US$374.3m, one year before. However, it does have US$694.6m in cash offsetting this, leading to net cash of US$419.1m.

A Look At Dampskibsselskabet Norden's Liabilities

According to the last reported balance sheet, Dampskibsselskabet Norden had liabilities of US$815.0m due within 12 months, and liabilities of US$362.1m due beyond 12 months. Offsetting this, it had US$694.6m in cash and US$401.6m in receivables that were due within 12 months. So its liabilities total US$80.9m more than the combination of its cash and short-term receivables.

Of course, Dampskibsselskabet Norden has a market capitalization of US$1.53b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 30% 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Dampskibsselskabet Norden actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Dampskibsselskabet Norden has US$419.1m in net cash. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in US$542m. So we are not troubled with Dampskibsselskabet Norden's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Dampskibsselskabet Norden that you should be aware of before investing here.

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.