NTG Clarity Networks (CVE:NCI) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that NTG Clarity Networks Inc. (CVE:NCI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've discovered 2 warning signs about NTG Clarity Networks. View them for free.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is NTG Clarity Networks's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NTG Clarity Networks had CA$7.66m of debt in December 2024, down from CA$8.67m, one year before. On the flip side, it has CA$4.95m in cash leading to net debt of about CA$2.72m.

How Healthy Is NTG Clarity Networks' Balance Sheet?

According to the last reported balance sheet, NTG Clarity Networks had liabilities of CA$9.53m due within 12 months, and liabilities of CA$6.16m due beyond 12 months. Offsetting this, it had CA$4.95m in cash and CA$16.9m in receivables that were due within 12 months. So it actually has CA$6.15m more liquid assets than total liabilities.

This surplus suggests that NTG Clarity Networks has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

Check out our latest analysis for NTG Clarity Networks

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

NTG Clarity Networks has a low net debt to EBITDA ratio of only 0.26. And its EBIT easily covers its interest expense, being 23.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that NTG Clarity Networks grew its EBIT by 327% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 NTG Clarity Networks 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. In the last three years, NTG Clarity Networks created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Happily, NTG Clarity Networks's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. Zooming out, NTG Clarity Networks seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for NTG Clarity Networks (1 is a bit unpleasant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.