Here's Why Nordic American Tankers (NYSE:NAT) Can Afford Some Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Nordic American Tankers Limited (NYSE:NAT) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Nordic American Tankers

What Is Nordic American Tankers's Net Debt?

As you can see below, Nordic American Tankers had US$354.6m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$35.6m, its net debt is less, at about US$319.0m.

How Strong Is Nordic American Tankers' Balance Sheet?

According to the last reported balance sheet, Nordic American Tankers had liabilities of US$88.8m due within 12 months, and liabilities of US$314.5m due beyond 12 months. Offsetting this, it had US$35.6m in cash and US$11.4m in receivables that were due within 12 months. So it has liabilities totalling US$356.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$486.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nordic American Tankers's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nordic American Tankers wasn't profitable at an EBIT level, but managed to grow its revenue by 2.8%, to US$206m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Nordic American Tankers produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$67m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$104m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Nordic American Tankers (including 2 which shouldn't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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