Is Nurminen Logistics Oyj (HEL:NLG1V) Using Too Much Debt?

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, Nurminen Logistics Oyj (HEL:NLG1V) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nurminen Logistics Oyj

How Much Debt Does Nurminen Logistics Oyj Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Nurminen Logistics Oyj had €30.8m of debt, an increase on €13.8m, over one year. However, it does have €4.47m in cash offsetting this, leading to net debt of about €26.3m.

How Healthy Is Nurminen Logistics Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nurminen Logistics Oyj had liabilities of €13.4m due within 12 months and liabilities of €39.0m due beyond that. Offsetting these obligations, it had cash of €4.47m as well as receivables valued at €7.41m due within 12 months. So it has liabilities totalling €40.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Nurminen Logistics Oyj has a market capitalization of €110.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nurminen Logistics Oyj 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.

In the last year Nurminen Logistics Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to €81m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Nurminen Logistics Oyj had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €206k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €5.3m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For example Nurminen Logistics Oyj has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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