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Nordson (NASDAQ:NDSN) seems to be using debt quite sensibly

David Iben put it well when he said, “Volatility is not a risk we care about. What we care about is avoiding permanent loss of capital.” So it should be obvious that you have to take debt into account when thinking about how risky a particular stock is, because too much debt can ruin a company. As with many other companies Nordson Corporation (NASDAQ:NDSN) is taking on debt. But should shareholders be concerned about the use of debt?

When is debt dangerous?

Debt helps a company until it struggles to pay it back with either fresh capital or free cash flow. If things go really bad, lenders can take control of the company. A more common (but still costly) situation, however, is that a company must dilute shareholders at a cheap share price just to get debt under control. The benefit of debt, of course, is that it often represents cheap capital, especially when it replaces a company’s dilution with the ability to reinvest at a high rate of return. When considering how much debt a company has, you should first look at its cash and debt together.

Check out our latest analysis for Nordson

How much debt does Nordson have?

The image below, which you can click on for more details, shows that Nordson had $1.53 billion in debt as of April 2024, which is an increase of $949.2 million in one year. However, since the company has a cash reserve of $125.4 million, its net debt is less at about $1.41 billion.

NasdaqGS:NDSN Debt-Equity History June 28, 2024

A look at Nordson’s liabilities

The most recent balance sheet data shows that Nordson had liabilities of $536.0 million due within a year and liabilities of $1.85 billion due thereafter. Offsetting these liabilities, it had cash of $125.4 million and receivables of $530.3 million due within 12 months. So the company’s liabilities equate to $1.73 billion more than its cash and near-term receivables combined.

Of course, Nordson has a gigantic market cap of $13.2 billion, so these liabilities are probably manageable, but it’s clear that we should continue to keep an eye on the company’s balance sheet to make sure it doesn’t change for the worse.

We measure a company’s debt load relative to its earnings power by dividing its net debt by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest expenses (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expenses associated with that debt (interest coverage ratio).

Nordson’s net debt of 1.7 times EBITDA suggests it uses debt responsibly. And the fact that trailing twelve-month EBIT was 9.1 times interest expense is consistent with this theme. Nordson was able to grow its EBIT by 7.2% over the last year. That’s far from incredible, but it’s a good thing when it comes to paying down debt. The balance sheet is clearly the area to focus on when analyzing debt. But it’s future earnings, more than anything, that will determine Nordson’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future, you can look at free Report with analysts’ profit forecasts.

After all, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is covered by actual free cash flow. Over the last three years, Nordson has recorded free cash flow equal to a whopping 80% of its EBIT, which is stronger than we would normally expect. This puts the company well-positioned to pay down debt should it choose to do so.

Our view

The good news is that Nordson’s proven ability to convert EBIT into free cash flow delights us as much as a fluffy puppy delights a toddler. And the good news doesn’t stop there, as its interest coverage reinforces this impression too! When we consider the above factors, it looks like Nordson is pretty sensible with its use of debt. While this does carry some risk, it can also increase shareholder returns. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – quite the opposite. For example, Nordson has 1 warning sign In our opinion, you should be aware of this.

Ultimately, it’s often better to focus on companies that have no net debt. You can access our special list of such companies (all with a track record of earnings growth). It’s free.

Valuation is complex, but we help simplify it.

Find out if Nordson may be overvalued or undervalued by reading our comprehensive analysis, which includes: Fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View free analysis

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

Valuation is complex, but we help simplify it.

Find out if Nordson may be overvalued or undervalued by reading our comprehensive analysis, which includes: Fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View free analysis

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]

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