Novabase S.G.P.S (FRA:NVQ) Could Easily Take On More Debt

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. We can see that Novabase S.G.P.S., S.A. (FRA:NVQ) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Novabase S.G.P.S's Net Debt?

The image below, which you can click on for greater detail, shows that Novabase S.G.P.S had debt of €9.59m at the end of December 2024, a reduction from €16.1m over a year. However, its balance sheet shows it holds €62.7m in cash, so it actually has €53.2m net cash.

How Strong Is Novabase S.G.P.S' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Novabase S.G.P.S had liabilities of €54.2m due within 12 months and liabilities of €23.4m due beyond that. Offsetting this, it had €62.7m in cash and €51.6m in receivables that were due within 12 months. So it can boast €36.8m more liquid assets than total liabilities.

This surplus suggests that Novabase S.G.P.S has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Novabase S.G.P.S has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Novabase S.G.P.S

Another good sign is that Novabase S.G.P.S has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Novabase S.G.P.S's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Novabase S.G.P.S may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Novabase S.G.P.S recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Novabase S.G.P.S has €53.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So is Novabase S.G.P.S's debt a risk? It doesn't seem so to us. 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 example - Novabase S.G.P.S has 4 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.