Is New Nordic Healthbrands (STO:NNH) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that New Nordic Healthbrands AB (publ) (STO:NNH) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for New Nordic Healthbrands

What Is New Nordic Healthbrands's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 New Nordic Healthbrands had debt of kr43.3m, up from kr27.2m in one year. On the flip side, it has kr11.5m in cash leading to net debt of about kr31.8m.

How Healthy Is New Nordic Healthbrands' Balance Sheet?

We can see from the most recent balance sheet that New Nordic Healthbrands had liabilities of kr124.6m falling due within a year, and liabilities of kr1.67m due beyond that. Offsetting this, it had kr11.5m in cash and kr118.0m in receivables that were due within 12 months. So it can boast kr3.29m more liquid assets than total liabilities.

This short term liquidity is a sign that New Nordic Healthbrands could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since New Nordic Healthbrands will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year New Nordic Healthbrands had a loss before interest and tax, and actually shrunk its revenue by 3.9%, to kr490m. That's not what we would hope to see.

Caveat Emptor

Importantly, New Nordic Healthbrands had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr4.3m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. For example, we've discovered 2 warning signs for New Nordic Healthbrands (1 is concerning!) that you should be aware of before investing here.

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.