Does Nordic LEVEL Group AB (publ.) (STO:LEVEL) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Nordic LEVEL Group AB (publ.) (STO:LEVEL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nordic LEVEL Group AB (publ.)

What Is Nordic LEVEL Group AB (publ.)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nordic LEVEL Group AB (publ.) had kr40.4m of debt in March 2024, down from kr100.3m, one year before. However, it does have kr25.2m in cash offsetting this, leading to net debt of about kr15.3m.

How Strong Is Nordic LEVEL Group AB (publ.)'s Balance Sheet?

We can see from the most recent balance sheet that Nordic LEVEL Group AB (publ.) had liabilities of kr168.3m falling due within a year, and liabilities of kr21.1m due beyond that. On the other hand, it had cash of kr25.2m and kr111.7m worth of receivables due within a year. So its liabilities total kr52.6m more than the combination of its cash and short-term receivables.

Nordic LEVEL Group AB (publ.) has a market capitalization of kr169.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Even though Nordic LEVEL Group AB (publ.)'s debt is only 1.9, its interest cover is really very low at 0.18. The main reason for this is that it has such high depreciation and amortisation. While companies often boast that these charges are non-cash, most such businesses will therefore require ongoing investment (that is not expensed.) Either way there's no doubt the stock is using meaningful leverage. We also note that Nordic LEVEL Group AB (publ.) improved its EBIT from a last year's loss to a positive kr1.3m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nordic LEVEL Group AB (publ.) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Nordic LEVEL Group AB (publ.) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Nordic LEVEL Group AB (publ.)'s interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least its net debt to EBITDA is not so bad. Once we consider all the factors above, together, it seems to us that Nordic LEVEL Group AB (publ.)'s debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Nordic LEVEL Group AB (publ.) (of which 1 is concerning!) you should know about.

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.