Nordic Iron Ore (STO:NIO) Is Making Moderate Use Of 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nordic Iron Ore AB (publ) (STO:NIO) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nordic Iron Ore

What Is Nordic Iron Ore's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Nordic Iron Ore had kr31.6m of debt, an increase on none, over one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Nordic Iron Ore's Balance Sheet?

According to the last reported balance sheet, Nordic Iron Ore had liabilities of kr31.6m due within 12 months, and liabilities of kr1.97m due beyond 12 months. On the other hand, it had cash of kr332.0k and kr439.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr32.8m.

Of course, Nordic Iron Ore has a market capitalization of kr233.2m, so these liabilities are probably manageable. 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 you can't view debt in total isolation; since Nordic Iron Ore 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.

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

Over the last twelve months Nordic Iron Ore produced an earnings before interest and tax (EBIT) loss. Indeed, it lost kr11m 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. However, it doesn't help that it burned through kr13m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Nordic Iron Ore (3 are a bit unpleasant!) that you should be aware of before investing here.

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.