Is Nordic Flanges Group (STO:NFGAB) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Nordic Flanges Group AB (publ) (STO:NFGAB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nordic Flanges Group

What Is Nordic Flanges Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Nordic Flanges Group had kr27.4m of debt, an increase on kr22.1m, over one year. On the flip side, it has kr4.43m in cash leading to net debt of about kr22.9m.

How Healthy Is Nordic Flanges Group's Balance Sheet?

The latest balance sheet data shows that Nordic Flanges Group had liabilities of kr70.9m due within a year, and liabilities of kr27.3m falling due after that. On the other hand, it had cash of kr4.43m and kr21.4m worth of receivables due within a year. So its liabilities total kr72.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr41.1m company, like a colossus towering over mere mortals. 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 19%, to kr168m. We would much prefer see growth.

Caveat Emptor

Not only did Nordic Flanges Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr13m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr848k in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 3 warning signs with Nordic Flanges Group (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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