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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Dampskibsselskabet Norden A/S (CPH:DNORD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Dampskibsselskabet Norden

What Is Dampskibsselskabet Norden's Debt?

You can click the graphic below for the historical numbers, but it shows that Dampskibsselskabet Norden had US$374.3m of debt in September 2022, down from US$450.4m, one year before. But on the other hand it also has US$683.2m in cash, leading to a US$308.9m net cash position.

A Look At Dampskibsselskabet Norden's Liabilities

We can see from the most recent balance sheet that Dampskibsselskabet Norden had liabilities of US$898.2m falling due within a year, and liabilities of US$612.8m due beyond that. Offsetting this, it had US$683.2m in cash and US$488.6m in receivables that were due within 12 months. So it has liabilities totalling US$339.2m more than its cash and near-term receivables, combined.

Given Dampskibsselskabet Norden has a market capitalization of US$1.99b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dampskibsselskabet Norden boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Dampskibsselskabet Norden grew its EBIT by 400% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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. 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

Although Dampskibsselskabet Norden's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$308.9m. And it impressed us with free cash flow of US$893m, being 130% of its EBIT. So we don't think Dampskibsselskabet Norden's use of debt is risky. 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 instance, we've identified 2 warning signs for Dampskibsselskabet Norden that you should be aware of.

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.