Is Nordic Semiconductor (OB:NOD) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Nordic Semiconductor ASA (OB:NOD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nordic Semiconductor

How Much Debt Does Nordic Semiconductor Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Nordic Semiconductor had debt of US$91.8m, up from none in one year. But it also has US$235.0m in cash to offset that, meaning it has US$143.2m net cash.

How Healthy Is Nordic Semiconductor's Balance Sheet?

We can see from the most recent balance sheet that Nordic Semiconductor had liabilities of US$105.4m falling due within a year, and liabilities of US$140.9m due beyond that. On the other hand, it had cash of US$235.0m and US$128.4m worth of receivables due within a year. So it actually has US$117.1m 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. Succinctly put, Nordic Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Nordic Semiconductor 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.

In the last year Nordic Semiconductor had a loss before interest and tax, and actually shrunk its revenue by 36%, to US$472m. To be frank that doesn't bode well.

So How Risky Is Nordic Semiconductor?

Statistically speaking companies that lose money are riskier than those that make money. 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$70m of cash and made a loss of US$21m. Given it only has net cash of US$143.2m, 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. 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 example - Nordic Semiconductor has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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