These 4 Measures Indicate That Novabase S.G.P.S (FRA:NVQ) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Novabase S.G.P.S

How Much Debt Does Novabase S.G.P.S Carry?

You can click the graphic below for the historical numbers, but it shows that Novabase S.G.P.S had €9.40m of debt in December 2022, down from €16.2m, one year before. But it also has €40.6m in cash to offset that, meaning it has €31.2m net cash.

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

The latest balance sheet data shows that Novabase S.G.P.S had liabilities of €72.7m due within a year, and liabilities of €9.72m falling due after that. Offsetting this, it had €40.6m in cash and €60.3m in receivables that were due within 12 months. So it can boast €18.5m 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. Succinctly put, Novabase S.G.P.S boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Novabase S.G.P.S grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Novabase S.G.P.S 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 51% 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 €31.2m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So is Novabase S.G.P.S's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Novabase S.G.P.S is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.