Is Nordic Iron Ore (STO:NIO) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nordic Iron Ore

What Is Nordic Iron Ore's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Nordic Iron Ore had kr32.1m of debt, an increase on kr27.3m, over one year. However, its balance sheet shows it holds kr118.5m in cash, so it actually has kr86.4m net cash.

How Healthy Is Nordic Iron Ore's Balance Sheet?

We can see from the most recent balance sheet that Nordic Iron Ore had liabilities of kr32.1m falling due within a year, and liabilities of kr1.84m due beyond that. Offsetting these obligations, it had cash of kr118.5m as well as receivables valued at kr877.0k due within 12 months. So it can boast kr85.4m more liquid assets than total liabilities.

This excess liquidity suggests that Nordic Iron Ore is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Nordic Iron Ore has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nordic Iron Ore's earnings that will influence how the balance sheet holds up in the future. 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.

Since Nordic Iron Ore has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Nordic Iron Ore?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Nordic Iron Ore had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr13m and booked a kr14m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of kr86.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 4 warning signs for Nordic Iron Ore you should be aware of, and 3 of them don't sit too well with us.

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.