Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Limited Nordic Group (SGX:MR7) uses debt. But does this debt worry shareholders?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Nordic Group

What is Nordic Group’s debt?

You can click on the graph below for historical figures, but it shows that in December 2021, Nordic Group had a debt of S$60.3 million, an increase from S$45.9 million, over a year. But on the other hand, he also has S$75.3 million in cash, resulting in a net cash position of S$15.1 million.

How strong is Nordic Group’s balance sheet?

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

This short-term liquidity is a sign that Nordic Group could probably repay its debt easily, as its balance sheet is far from stretched. In short, Nordic Group has a net cash position, so it is fair to say that it is not very leveraged!

What is even more impressive is that Nordic Group increased its EBIT by 288% year-over-year. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Nordic Group that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, while the taxman may love accounting profits, lenders only accept cash. Although Nordic Group has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Fortunately for all shareholders, Nordic Group has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summary

While it’s always a good idea to investigate a company’s debt, in this case Nordic Group has $15.1 million in net cash and a decent balance sheet. The icing on the cake was converting 155% of that EBIT into free cash flow, bringing in S$9.2 million. We therefore do not believe Nordic Group’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for Nordic Group (1 is concerning) that you should be aware of.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.