Here's Why Nordrest Holding (STO:NREST) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Nordrest Holding AB (publ) (STO:NREST) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nordrest Holding

How Much Debt Does Nordrest Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Nordrest Holding had kr72.4m of debt, an increase on kr34.5m, over one year. However, it does have kr136.7m in cash offsetting this, leading to net cash of kr64.2m.

A Look At Nordrest Holding's Liabilities

We can see from the most recent balance sheet that Nordrest Holding had liabilities of kr372.5m falling due within a year, and liabilities of kr139.2m due beyond that. On the other hand, it had cash of kr136.7m and kr145.2m worth of receivables due within a year. So it has liabilities totalling kr229.7m more than its cash and near-term receivables, combined.

Since publicly traded Nordrest Holding shares are worth a total of kr1.60b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Nordrest Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Nordrest Holding grew its EBIT by 15% last year, making its debt load easier to handle. 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 Nordrest Holding'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nordrest Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Nordrest Holding recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Nordrest Holding does have more liabilities than liquid assets, it also has net cash of kr64.2m. And we liked the look of last year's 15% year-on-year EBIT growth. So we don't have any problem with Nordrest Holding's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nordrest Holding is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.