Health Check: How Prudently Does Nordic Flanges Group (STO:NFGAB) Use Debt?

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.' 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 can see that Nordic Flanges Group AB (publ) (STO:NFGAB) does use debt in its business. But the more important question is: how much risk is that debt creating?

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.

View our latest analysis for Nordic Flanges Group

How Much Debt Does Nordic Flanges Group Carry?

As you can see below, Nordic Flanges Group had kr36.1m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr5.27m in cash offsetting this, leading to net debt of about kr30.8m.

A Look At Nordic Flanges Group's Liabilities

The latest balance sheet data shows that Nordic Flanges Group had liabilities of kr84.4m due within a year, and liabilities of kr17.0m falling due after that. Offsetting this, it had kr5.27m in cash and kr27.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr68.2m.

The deficiency here weighs heavily on the kr32.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Nordic Flanges Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Nordic Flanges Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Nordic Flanges Group had a loss before interest and tax, and actually shrunk its revenue by 14%, to kr230m. We would much prefer see growth.

Caveat Emptor

While Nordic Flanges Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr8.9m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr5.9m over the last twelve months. So suffice it to say we consider the stock to be risky. 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 5 warning signs for Nordic Flanges Group 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.