Nordic Flanges Group (STO:NFGAB) Has Debt But No Earnings; Should You Worry?

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 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. We can see that Nordic Flanges Group AB (publ) (STO:NFGAB) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

See 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 Nordic Flanges Group had kr16.8m of debt in December 2020, down from kr24.9m, one year before. However, it does have kr3.83m in cash offsetting this, leading to net debt of about kr12.9m.

How Healthy Is Nordic Flanges Group's Balance Sheet?

According to the last reported balance sheet, Nordic Flanges Group had liabilities of kr50.4m due within 12 months, and liabilities of kr21.5m due beyond 12 months. Offsetting this, it had kr3.83m in cash and kr19.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr49.0m.

When you consider that this deficiency exceeds the company's kr42.4m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. 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 9.1%, to kr189m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Nordic Flanges Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable kr6.9m 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. It's fair to say the loss of kr12m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Nordic Flanges Group (of which 2 are a bit concerning!) you should know about.

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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