We Think Dampskibsselskabet Norden (CPH:DNORD) Can Stay On Top Of Its Debt

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. As with many other companies Dampskibsselskabet Norden A/S (CPH:DNORD) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Dampskibsselskabet Norden had US$320.0m of debt, an increase on US$303.3m, over one year. But it also has US$331.6m in cash to offset that, meaning it has US$11.6m net cash.

A Look At Dampskibsselskabet Norden's Liabilities

The latest balance sheet data shows that Dampskibsselskabet Norden had liabilities of US$426.6m due within a year, and liabilities of US$495.7m falling due after that. On the other hand, it had cash of US$331.6m and US$185.4m worth of receivables due within a year. So its liabilities total US$405.3m more than the combination of its cash and short-term receivables.

Dampskibsselskabet Norden has a market capitalization of US$869.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Pleasingly, Dampskibsselskabet Norden is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 132% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dampskibsselskabet Norden's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$11.6m. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in US$297m. So we don't think Dampskibsselskabet Norden's use of debt is risky. 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. We've identified 3 warning signs with Dampskibsselskabet Norden (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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