NTG Nordic Transport Group (CPH:NTG) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, NTG Nordic Transport Group A/S (CPH:NTG) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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?

As you can see below, at the end of September 2021, NTG Nordic Transport Group had kr.288.6m of debt, up from kr.47.9m a year ago. Click the image for more detail. However, it does have kr.248.0m in cash offsetting this, leading to net debt of about kr.40.6m.

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

The latest balance sheet data shows that NTG Nordic Transport Group had liabilities of kr.1.81b due within a year, and liabilities of kr.852.8m falling due after that. Offsetting this, it had kr.248.0m in cash and kr.1.34b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.1.08b.

Given NTG Nordic Transport Group has a market capitalization of kr.10.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, NTG Nordic Transport Group has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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 has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.086 and EBIT of 12.7 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. In addition to that, we're happy to report that NTG Nordic Transport Group has boosted its EBIT by 97%, thus reducing the spectre of future debt repayments. 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 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into 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

NTG Nordic Transport Group's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. It looks NTG Nordic Transport Group has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with NTG Nordic Transport Group , 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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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.