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. As with many other companies New Nordic Healthbrands AB (publ) (STO:NNH) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 New Nordic Healthbrands
What Is New Nordic Healthbrands's Debt?
As you can see below, New Nordic Healthbrands had kr38.1m of debt at June 2023, down from kr41.7m a year prior. However, because it has a cash reserve of kr16.6m, its net debt is less, at about kr21.6m.
How Healthy Is New Nordic Healthbrands' Balance Sheet?
The latest balance sheet data shows that New Nordic Healthbrands had liabilities of kr139.7m due within a year, and liabilities of kr1.88m falling due after that. Offsetting this, it had kr16.6m in cash and kr105.2m in receivables that were due within 12 months. So its liabilities total kr19.8m more than the combination of its cash and short-term receivables.
Of course, New Nordic Healthbrands has a market capitalization of kr144.3m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is New Nordic Healthbrands's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, New Nordic Healthbrands made a loss at the EBIT level, and saw its revenue drop to kr490m, which is a fall of 2.1%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months New Nordic Healthbrands produced an earnings before interest and tax (EBIT) loss. Indeed, it lost kr272k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of kr15m and the profit of kr1.2m. So one might argue that there's still a chance it can get things on the right track. 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. Be aware that New Nordic Healthbrands is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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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About OM:NNH
New Nordic Healthbrands
Develops and markets dietary supplements, herbal remedies, and personal care products in the Nordic countries, rest of Europe, North America, and internationally.
Mediocre balance sheet low.