Is NFON (ETR:NFN) Using Debt Sensibly?

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.' 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. As with many other companies NFON AG (ETR:NFN) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NFON

What Is NFON's Debt?

As you can see below, at the end of March 2023, NFON had €5.75m of debt, up from €1.90m a year ago. Click the image for more detail. However, it does have €12.5m in cash offsetting this, leading to net cash of €6.70m.

How Strong Is NFON's Balance Sheet?

We can see from the most recent balance sheet that NFON had liabilities of €15.0m falling due within a year, and liabilities of €7.26m due beyond that. Offsetting these obligations, it had cash of €12.5m as well as receivables valued at €10.1m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that NFON's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €118.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that NFON has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NFON'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.

In the last year NFON wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to €81m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is NFON?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year NFON had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €11m of cash and made a loss of €14m. But at least it has €6.70m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how NFON's profit, revenue, and operating cashflow have changed over the last few years.

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.