Here's Why Nordic Semiconductor (OB:NOD) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Nordic Semiconductor ASA (OB:NOD) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nordic Semiconductor

What Is Nordic Semiconductor's Net Debt?

As you can see below, at the end of December 2023, Nordic Semiconductor had US$97.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$291.0m in cash, so it actually has US$193.5m net cash.

How Strong Is Nordic Semiconductor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nordic Semiconductor had liabilities of US$114.2m due within 12 months and liabilities of US$146.0m due beyond that. On the other hand, it had cash of US$291.0m and US$155.2m worth of receivables due within a year. So it can boast US$186.0m 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.

It is just as well that Nordic Semiconductor's load is not too heavy, because its EBIT was down 97% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Nordic Semiconductor'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nordic Semiconductor has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Nordic Semiconductor reported free cash flow worth 3.9% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nordic Semiconductor has net cash of US$193.5m, as well as more liquid assets than liabilities. So we don't have any problem with Nordic Semiconductor's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Nordic Semiconductor (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.