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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Nordic Semiconductor ASA (OB:NOD) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nordic Semiconductor

What Is Nordic Semiconductor's Net Debt?

As you can see below, Nordic Semiconductor had US$87.3m of debt at December 2024, down from US$97.5m a year prior. But on the other hand it also has US$287.9m in cash, leading to a US$200.6m net cash position.

How Strong Is Nordic Semiconductor's Balance Sheet?

According to the last reported balance sheet, Nordic Semiconductor had liabilities of US$103.1m due within 12 months, and liabilities of US$133.9m due beyond 12 months. Offsetting these obligations, it had cash of US$287.9m as well as receivables valued at US$93.4m due within 12 months. So it actually has US$144.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Nordic Semiconductor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nordic Semiconductor 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 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nordic Semiconductor had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to US$511m. We would much prefer see growth.

So How Risky Is Nordic Semiconductor?

Although Nordic Semiconductor had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$31m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 1 warning sign for Nordic Semiconductor that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.