Is NTG Nordic Transport Group (CPH:NTG) A Risky Investment?

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 NTG Nordic Transport Group A/S (CPH:NTG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its 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 at June 2022 NTG Nordic Transport Group had debt of kr.805.4m, up from kr.22.1m in one year. However, it also had kr.260.2m in cash, and so its net debt is kr.545.2m.

How Healthy Is NTG Nordic Transport Group's Balance Sheet?

The latest balance sheet data shows that NTG Nordic Transport Group had liabilities of kr.2.56b due within a year, and liabilities of kr.1.10b falling due after that. Offsetting these obligations, it had cash of kr.260.2m as well as receivables valued at kr.2.01b due within 12 months. So it has liabilities totalling kr.1.39b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since NTG Nordic Transport Group has a market capitalization of kr.5.11b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

NTG Nordic Transport Group's net debt is only 0.81 times its EBITDA. And its EBIT easily covers its interest expense, being 27.4 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that NTG Nordic Transport Group has boosted its EBIT by 67%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, NTG Nordic Transport Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, NTG Nordic Transport Group's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Overall, we don't think NTG Nordic Transport Group is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. 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. For instance, we've identified 1 warning sign for NTG Nordic Transport Group that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.