Is New Nordic Healthbrands (STO:NNH) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies New Nordic Healthbrands AB (publ) (STO:NNH) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for New Nordic Healthbrands

What Is New Nordic Healthbrands's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 New Nordic Healthbrands had debt of kr50.1m, up from kr14.5m in one year. However, it does have kr11.4m in cash offsetting this, leading to net debt of about kr38.7m.

How Strong Is New Nordic Healthbrands' Balance Sheet?

The latest balance sheet data shows that New Nordic Healthbrands had liabilities of kr145.7m due within a year, and liabilities of kr3.61m falling due after that. Offsetting these obligations, it had cash of kr11.4m as well as receivables valued at kr133.2m due within 12 months. So it has liabilities totalling kr4.72m more than its cash and near-term receivables, combined.

Given New Nordic Healthbrands has a market capitalization of kr182.1m, it's hard to believe these liabilities pose much threat. 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 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 2.9%, to kr497m. 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 kr2.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through kr32m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that New Nordic Healthbrands is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.