These 4 Measures Indicate That Nordic Group (SGX:MR7) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. We can see that Nordic Group Limited (SGX:MR7) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nordic Group

How Much Debt Does Nordic Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Nordic Group had S$52.9m of debt, an increase on S$40.2m, over one year. But on the other hand it also has S$57.3m in cash, leading to a S$4.36m net cash position.

How Healthy Is Nordic Group's Balance Sheet?

We can see from the most recent balance sheet that Nordic Group had liabilities of S$66.6m falling due within a year, and liabilities of S$13.9m due beyond that. Offsetting this, it had S$57.3m in cash and S$18.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$4.59m.

Since publicly traded Nordic Group shares are worth a total of S$87.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Nordic Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Nordic Group's EBIT was down 39% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Nordic Group generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Nordic Group's liabilities, but we can be reassured by the fact it has has net cash of S$4.36m. And it impressed us with free cash flow of S$12m, being 93% of its EBIT. So we are not troubled with Nordic Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Nordic Group (1 doesn't sit too well with us) you should be aware of.

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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