Norrhydro Group Oyj (HEL:NORRH) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Norrhydro Group Oyj (HEL:NORRH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Norrhydro Group Oyj

What Is Norrhydro Group Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that Norrhydro Group Oyj had debt of €10.2m at the end of December 2024, a reduction from €11.0m over a year. However, it also had €569.0k in cash, and so its net debt is €9.59m.

A Look At Norrhydro Group Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that Norrhydro Group Oyj had liabilities of €8.41m due within 12 months and liabilities of €7.61m due beyond that. Offsetting these obligations, it had cash of €569.0k as well as receivables valued at €1.16m due within 12 months. So its liabilities total €14.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €16.1m, so it does suggest shareholders should keep an eye on Norrhydro Group Oyj's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Norrhydro Group Oyj'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.

In the last year Norrhydro Group Oyj had a loss before interest and tax, and actually shrunk its revenue by 20%, to €24m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Norrhydro Group Oyj's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €85k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €434k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Be aware that Norrhydro Group Oyj is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.