Health Check: How Prudently Does Nordic Semiconductor (OB:NOD) 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.' 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. As with many other companies Nordic Semiconductor ASA (OB:NOD) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nordic Semiconductor

What Is Nordic Semiconductor's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Nordic Semiconductor had debt of US$94.4m, up from none in one year. But it also has US$260.9m in cash to offset that, meaning it has US$166.5m net cash.

How Strong Is Nordic Semiconductor's Balance Sheet?

The latest balance sheet data shows that Nordic Semiconductor had liabilities of US$115.1m due within a year, and liabilities of US$142.7m falling due after that. Offsetting this, it had US$260.9m in cash and US$130.3m in receivables that were due within 12 months. So it actually has US$133.3m more liquid assets than total liabilities.

This surplus suggests that Nordic Semiconductor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nordic Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nordic Semiconductor can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Nordic Semiconductor made a loss at the EBIT level, and saw its revenue drop to US$469m, which is a fall of 25%. To be frank that doesn't bode well.

So How Risky Is Nordic Semiconductor?

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 Semiconductor lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$37m of cash and made a loss of US$47m. Given it only has net cash of US$166.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Nordic Semiconductor .

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.