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.' 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. Importantly, Dampskibsselskabet Norden A/S (CPH:DNORD) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dampskibsselskabet Norden

What Is Dampskibsselskabet Norden's Net Debt?

The image below, which you can click on for greater detail, shows that Dampskibsselskabet Norden had debt of US$182.6m at the end of March 2024, a reduction from US$285.9m over a year. However, it does have US$441.8m in cash offsetting this, leading to net cash of US$259.2m.

How Healthy Is Dampskibsselskabet Norden's Balance Sheet?

The latest balance sheet data shows that Dampskibsselskabet Norden had liabilities of US$850.6m due within a year, and liabilities of US$254.0m falling due after that. Offsetting this, it had US$441.8m in cash and US$522.5m in receivables that were due within 12 months. So its liabilities total US$140.3m more than the combination of its cash and short-term receivables.

Given Dampskibsselskabet Norden has a market capitalization of US$1.47b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

It is just as well that Dampskibsselskabet Norden's load is not too heavy, because its EBIT was down 66% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dampskibsselskabet Norden will need earnings to service that debt. 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. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Dampskibsselskabet Norden's liabilities, but we can be reassured by the fact it has has net cash of US$259.2m. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in US$130m. So we are not troubled with Dampskibsselskabet Norden's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Dampskibsselskabet Norden you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.