Is Dampskibsselskabet Norden (CPH:DNORD) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dampskibsselskabet Norden

What Is Dampskibsselskabet Norden's Debt?

The chart below, which you can click on for greater detail, shows that Dampskibsselskabet Norden had US$323.6m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds US$325.5m in cash, so it actually has US$1.90m net cash.

How Strong Is Dampskibsselskabet Norden's Balance Sheet?

We can see from the most recent balance sheet that Dampskibsselskabet Norden had liabilities of US$465.9m falling due within a year, and liabilities of US$514.5m due beyond that. On the other hand, it had cash of US$325.5m and US$191.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$463.1m.

This deficit is considerable relative to its market capitalization of US$703.4m, so it does suggest shareholders should keep an eye on Dampskibsselskabet Norden's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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.

Notably, Dampskibsselskabet Norden's EBIT launched higher than Elon Musk, gaining a whopping 191% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dampskibsselskabet Norden can strengthen its balance sheet over time. 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 recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Dampskibsselskabet Norden does have more liabilities than liquid assets, it also has net cash of US$1.90m. And it impressed us with free cash flow of US$339m, being 95% of its EBIT. 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. Be aware that Dampskibsselskabet Norden is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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