These 4 Measures Indicate That New Nordic Healthbrands (STO:NNH) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that New Nordic Healthbrands AB (publ) (STO:NNH) does use debt in its business. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for New Nordic Healthbrands

What Is New Nordic Healthbrands's Net Debt?

As you can see below, at the end of September 2020, New Nordic Healthbrands had kr16.9m of debt, up from kr13.5m a year ago. Click the image for more detail. However, it also had kr11.2m in cash, and so its net debt is kr5.68m.

How Strong Is New Nordic Healthbrands' Balance Sheet?

We can see from the most recent balance sheet that New Nordic Healthbrands had liabilities of kr94.1m falling due within a year, and liabilities of kr5.71m due beyond that. Offsetting these obligations, it had cash of kr11.2m as well as receivables valued at kr106.7m due within 12 months. So it actually has kr18.1m more liquid assets than total liabilities.

This surplus suggests that New Nordic Healthbrands has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

New Nordic Healthbrands has a low net debt to EBITDA ratio of only 0.21. And its EBIT easily covers its interest expense, being 30.6 times the size. So we're pretty relaxed about its super-conservative use of debt. In fact New Nordic Healthbrands's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, New Nordic Healthbrands recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Based on what we've seen New Nordic Healthbrands is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that New Nordic Healthbrands is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. For instance, we've identified 3 warning signs for New Nordic Healthbrands that you should be aware of.

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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