These 4 Measures Indicate That Nabaltec (ETR:NTG) Is Using Debt Reasonably Well

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Nabaltec AG (ETR:NTG) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nabaltec

What Is Nabaltec's Debt?

The chart below, which you can click on for greater detail, shows that Nabaltec had €91.7m in debt in March 2024; about the same as the year before. But it also has €113.4m in cash to offset that, meaning it has €21.8m net cash.

How Healthy Is Nabaltec's Balance Sheet?

The latest balance sheet data shows that Nabaltec had liabilities of €25.5m due within a year, and liabilities of €123.0m falling due after that. Offsetting these obligations, it had cash of €113.4m as well as receivables valued at €6.71m due within 12 months. So it has liabilities totalling €28.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Nabaltec has a market capitalization of €116.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Nabaltec boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Nabaltec's load is not too heavy, because its EBIT was down 29% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nabaltec's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nabaltec 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, Nabaltec generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Nabaltec does have more liabilities than liquid assets, it also has net cash of €21.8m. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in €20m. So we are not troubled with Nabaltec's debt use. 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. We've identified 2 warning signs with Nabaltec , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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