We Think Dampskibsselskabet Norden (CPH:DNORD) Can Manage Its Debt With Ease

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 can see that Dampskibsselskabet Norden A/S (CPH:DNORD) does use debt in its business. 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. 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. 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.

View 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$285.9m of debt in March 2023, down from US$411.2m, one year before. However, it does have US$772.0m in cash offsetting this, leading to net cash of US$486.1m.

How Healthy Is Dampskibsselskabet Norden's Balance Sheet?

The latest balance sheet data shows that Dampskibsselskabet Norden had liabilities of US$877.2m due within a year, and liabilities of US$462.3m falling due after that. Offsetting this, it had US$772.0m in cash and US$425.7m in receivables that were due within 12 months. So it has liabilities totalling US$141.8m more than its cash and near-term receivables, combined.

Since publicly traded Dampskibsselskabet Norden shares are worth a total of US$1.63b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Dampskibsselskabet Norden boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Dampskibsselskabet Norden grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dampskibsselskabet Norden's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Dampskibsselskabet Norden has US$486.1m in net cash. And it impressed us with free cash flow of US$1.1b, being 128% of its EBIT. So is Dampskibsselskabet Norden's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Dampskibsselskabet Norden .

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.