These 4 metrics indicate that New Nordic Healthbrands (STO: NNH) is using debt reasonably well

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that New Nordic Healthbrands AB (released) (STO: NNH) uses debt in its operations. But the real question is whether this debt makes the business risky.

When Is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for New Nordic Healthbrands

How much debt do the new Nordic health brands carry?

You can click on the graph below for historical figures, but it shows that in June 2021 New Nordic Healthbrands had a debt of kr 15.4million, an increase from kr 12.5million, over a year. However, he has 11.0 million kr in cash offsetting this, which leads to a net debt of around 4.36 million kr.

OM: NNH History of debt to equity October 30, 2021

How strong is New Nordic Healthbrands’ balance sheet?

Zooming in on the latest balance sheet data, we can see that New Nordic Healthbrands had a liability of 114.2 million kr due within 12 months and a liability of 5.06 million kr due beyond. In compensation for these obligations, he had cash of 11.0 million kr as well as receivables valued at 124.1 million kr due within 12 months. He can therefore boast of 15.9 million crowns more liquid assets than total Liabilities.

This surplus suggests that New Nordic Healthbrands has a prudent balance sheet and could likely eliminate its debt without too much difficulty. With virtually no net debt, New Nordic Healthbrands does indeed have very small debt.

We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

New Nordic Healthbrands’ net debt is only 0.12 times its EBITDA. And its EBIT covers its interest costs 133 times. So we’re pretty relaxed about its ultra-conservative use of debt. Another good thing is that New Nordic Healthbrands increased their EBIT by 12% over the past year, further increasing their ability to manage debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since New Nordic Healthbrands will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, New Nordic Healthbrands’ free cash flow has been 34% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.

Our point of view

The good news is that New Nordic Healthbrands’ demonstrated ability to cover their interest costs with their EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a little concerned about its conversion from EBIT to free cash flow. When we consider the range of factors above, it seems New Nordic Healthbrands is pretty reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for new Nordic health brands that you need to be aware of.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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

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