Does NTG Nordic Transport Group (CPH:NTG) Have A Healthy Balance Sheet?

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 can see that NTG Nordic Transport Group A/S (CPH:NTG) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NTG Nordic Transport Group

What Is NTG Nordic Transport Group's Debt?

The image below, which you can click on for greater detail, shows that NTG Nordic Transport Group had debt of kr.22.1m at the end of June 2021, a reduction from kr.46.1m over a year. But on the other hand it also has kr.208.2m in cash, leading to a kr.186.1m net cash position.

A Look At NTG Nordic Transport Group's Liabilities

Zooming in on the latest balance sheet data, we can see that NTG Nordic Transport Group had liabilities of kr.1.54b due within 12 months and liabilities of kr.583.9m due beyond that. On the other hand, it had cash of kr.208.2m and kr.1.23b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.678.5m.

Since publicly traded NTG Nordic Transport Group shares are worth a total of kr.12.2b, 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, NTG Nordic Transport Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, NTG Nordic Transport Group grew its EBIT by 90% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NTG Nordic Transport Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. NTG Nordic Transport Group 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. Happily for any shareholders, NTG Nordic Transport Group actually produced more free cash flow than EBIT over the last three years. 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 NTG Nordic Transport Group's liabilities, but we can be reassured by the fact it has has net cash of kr.186.1m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in kr.381m. So we don't think NTG Nordic Transport Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for NTG Nordic Transport Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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