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May 07, 2023

Nordic Flanges Group (STO:NFGAB) Has No Shortage Of Debt

Stock Analysis Howard Marks put it nicely when he said that, rather than

Stock Analysis

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Nordic Flanges Group AB (publ) (STO:NFGAB) makes use of debt. But the more important question is: how much risk is that debt creating?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nordic Flanges Group

As you can see below, at the end of December 2022, Nordic Flanges Group had kr66.7m of debt, up from kr30.9m a year ago. Click the image for more detail. However, it also had kr5.45m in cash, and so its net debt is kr61.3m.

We can see from the most recent balance sheet that Nordic Flanges Group had liabilities of kr69.7m falling due within a year, and liabilities of kr36.2m due beyond that. Offsetting these obligations, it had cash of kr5.45m as well as receivables valued at kr19.8m due within 12 months. So its liabilities total kr80.7m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's kr69.3m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Nordic Flanges Group shareholders face the double whammy of a high net debt to EBITDA ratio (6.2), and fairly weak interest coverage, since EBIT is just 0.036 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Nordic Flanges Group is that it turned last year's EBIT loss into a gain of kr329k, over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nordic Flanges Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Nordic Flanges Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

To be frank both Nordic Flanges Group's interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. After considering the datapoints discussed, we think Nordic Flanges Group has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Nordic Flanges Group that you should be aware of.

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.

Find out whether Nordic Flanges Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Nordic Flanges Group AB (publ) produces and sells industrial flanges in Sweden, rest of the Nordic region, and internationally.

Slightly overvalued with imperfect balance sheet.