Health Check: How Prudently Does Northern Ocean (OB:NOL) Use Debt?

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. Importantly, Northern Ocean Ltd. (OB:NOL) does carry debt. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Northern Ocean. Read for free now.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is Northern Ocean's Debt?

The chart below, which you can click on for greater detail, shows that Northern Ocean had US$530.8m in debt in December 2024; about the same as the year before. However, it does have US$42.8m in cash offsetting this, leading to net debt of about US$488.0m.

A Look At Northern Ocean's Liabilities

The latest balance sheet data shows that Northern Ocean had liabilities of US$67.0m due within a year, and liabilities of US$518.5m falling due after that. Offsetting this, it had US$42.8m in cash and US$55.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$487.1m.

This deficit casts a shadow over the US$175.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Northern Ocean would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Northern Ocean can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

See our latest analysis for Northern Ocean

Over 12 months, Northern Ocean reported revenue of US$253m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Northern Ocean had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$10m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$75m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For instance, we've identified 2 warning signs for Northern Ocean (1 is significant) you should be aware of.

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.