Is Nordic Iron Ore (STO:NIO) 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.' 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. Importantly, Nordic Iron Ore AB (publ) (STO:NIO) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Nordic Iron Ore

How Much Debt Does Nordic Iron Ore Carry?

As you can see below, at the end of June 2023, Nordic Iron Ore had kr27.3m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of kr987.0k, its net debt is less, at about kr26.4m.

A Look At Nordic Iron Ore's Liabilities

Zooming in on the latest balance sheet data, we can see that Nordic Iron Ore had liabilities of kr27.3m due within 12 months and liabilities of kr1.97m due beyond that. Offsetting these obligations, it had cash of kr987.0k as well as receivables valued at kr439.0k due within 12 months. So its liabilities total kr27.9m more than the combination of its cash and short-term receivables.

Since publicly traded Nordic Iron Ore shares are worth a total of kr360.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Nordic Iron Ore'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.

Given its lack of meaningful operating revenue, investors are probably hoping that Nordic Iron Ore finds some valuable resources, before it runs out of money.

Caveat Emptor

Importantly, Nordic Iron Ore had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost kr9.5m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr9.3m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 4 warning signs for Nordic Iron Ore (2 don't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.