New Nordic Healthbrands (STO:NNH) Is Making Moderate Use Of Debt

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 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. We note that New Nordic Healthbrands AB (publ) (STO:NNH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for New Nordic Healthbrands

How Much Debt Does New Nordic Healthbrands Carry?

The image below, which you can click on for greater detail, shows that New Nordic Healthbrands had debt of kr35.9m at the end of September 2023, a reduction from kr50.1m over a year. However, it does have kr13.6m in cash offsetting this, leading to net debt of about kr22.3m.

A Look At New Nordic Healthbrands' Liabilities

The latest balance sheet data shows that New Nordic Healthbrands had liabilities of kr143.7m due within a year, and liabilities of kr1.89m falling due after that. Offsetting these obligations, it had cash of kr13.6m as well as receivables valued at kr122.2m due within 12 months. So it has liabilities totalling kr9.79m more than its cash and near-term receivables, combined.

Since publicly traded New Nordic Healthbrands shares are worth a total of kr111.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, New Nordic Healthbrands had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr3.9m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of kr4.0m. So in short it's a really risky stock. 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. We've identified 2 warning signs with New Nordic Healthbrands (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.