Is Nordic Aqua Partners (OB:NOAP) Using Debt In A Risky Way?

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 Nordic Aqua Partners A/S (OB:NOAP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nordic Aqua Partners

What Is Nordic Aqua Partners's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Nordic Aqua Partners had €15.0m of debt, an increase on none, over one year. But on the other hand it also has €23.2m in cash, leading to a €8.22m net cash position.

How Strong Is Nordic Aqua Partners' Balance Sheet?

The latest balance sheet data shows that Nordic Aqua Partners had liabilities of €3.72m due within a year, and liabilities of €24.5m falling due after that. Offsetting this, it had €23.2m in cash and €5.08m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Nordic Aqua Partners' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €147.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Nordic Aqua Partners has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nordic Aqua Partners 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.

It seems likely shareholders hope that Nordic Aqua Partners can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Nordic Aqua Partners?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Nordic Aqua Partners lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €37m and booked a €8.2m accounting loss. Given it only has net cash of €8.22m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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, we've discovered 3 warning signs for Nordic Aqua Partners (1 is concerning!) that you should be aware of before investing here.

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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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.