Nordic Group (SGX:MR7) Seems To Use Debt Rather Sparingly

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.' 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. As with many other companies Nordic Group Limited (SGX:MR7) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Group

What Is Nordic Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Nordic Group had S$60.3m of debt, an increase on S$45.9m, over one year. But on the other hand it also has S$75.3m in cash, leading to a S$15.1m net cash position.

How Strong Is Nordic Group's Balance Sheet?

The latest balance sheet data shows that Nordic Group had liabilities of S$85.9m due within a year, and liabilities of S$8.70m falling due after that. On the other hand, it had cash of S$75.3m and S$34.1m worth of receivables due within a year. So it actually has S$14.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Nordic Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nordic Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Nordic Group grew its EBIT by 288% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Nordic Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nordic Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Nordic Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Nordic Group has S$15.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in S$9.2m. So we don't think Nordic Group's use of debt is risky. 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. For instance, we've identified 2 warning signs for Nordic Group (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.