Is NFON (ETR:NFN) Using Too Much Debt?

Warren Buffett famously said, '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. We note that NFON AG (ETR:NFN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for NFON

What Is NFON's Debt?

As you can see below, NFON had €9.35m of debt at September 2020, down from €14.0m a year prior. But on the other hand it also has €26.1m in cash, leading to a €16.7m net cash position.

How Healthy Is NFON's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NFON had liabilities of €21.2m due within 12 months and liabilities of €4.57m due beyond that. Offsetting these obligations, it had cash of €26.1m as well as receivables valued at €8.31m due within 12 months. So it can boast €8.59m more liquid assets than total liabilities.

This surplus suggests that NFON has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NFON boasts net cash, so it's fair to say it does not have a heavy debt load! 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 NFON 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.

In the last year NFON wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to €65m. With any luck the company will be able to grow its way to profitability.

So How Risky Is NFON?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NFON had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €7.2m of cash and made a loss of €4.0m. But at least it has €16.7m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, NFON may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like NFON I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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