Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. Importantly, Nordic Entertainment Group AB (publ) (STO:NENT B) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Entertainment Group
How Much Debt Does Nordic Entertainment Group Carry?
The image below, which you can click on for greater detail, shows that Nordic Entertainment Group had debt of kr3.30b at the end of June 2021, a reduction from kr5.18b over a year. But it also has kr5.42b in cash to offset that, meaning it has kr2.12b net cash.
How Healthy Is Nordic Entertainment Group’s Balance Sheet?
According to the last reported balance sheet, Nordic Entertainment Group had liabilities of kr7.81b due within 12 months, and liabilities of kr3.33b due beyond 12 months. Offsetting this, it had kr5.42b in cash and kr1.36b in receivables that were due within 12 months. So its liabilities total kr4.36b more than the combination of its cash and short-term receivables.
Of course, Nordic Entertainment Group has a market capitalization of kr39.2b, so these liabilities are probably manageable. 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 Entertainment Group also has more cash than debt, so we’re pretty confident it can manage its debt safely.
But the bad news is that Nordic Entertainment Group has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nordic Entertainment Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nordic Entertainment 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 Entertainment Group produced sturdy free cash flow equating to 72% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
Although Nordic Entertainment Group’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr2.12b. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in kr1.6b. So we are not troubled with Nordic Entertainment Group’s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. These risks can be hard to spot. Every company has them, and we’ve spotted 4 warning signs for Nordic Entertainment Group you should know about.
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.
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