Is Nordic Fibreboard (TAL:SKN1T) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nordic Fibreboard AS (TAL:SKN1T) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Nordic Fibreboard

How Much Debt Does Nordic Fibreboard Carry?

You can click the graphic below for the historical numbers, but it shows that Nordic Fibreboard had €3.20m of debt in December 2020, down from €4.45m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Nordic Fibreboard's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nordic Fibreboard had liabilities of €1.85m due within 12 months and liabilities of €3.15m due beyond that. On the other hand, it had cash of €26.0k and €686.0k worth of receivables due within a year. So its liabilities total €4.29m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €2.92m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nordic Fibreboard will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Nordic Fibreboard made a loss at the EBIT level, and saw its revenue drop to €10m, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Nordic Fibreboard's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €18k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of €192k and the profit of €1.1m. So there is definitely a chance that it can improve things in the next few years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Nordic Fibreboard (of which 2 are significant!) you should know about.

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. 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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