Is Naturhouse Health (BME:NTH) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Naturhouse Health, S.A. (BME:NTH) does carry debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Naturhouse Health

What Is Naturhouse Health's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Naturhouse Health had €3.34m of debt, an increase on €2.73m, over one year. But on the other hand it also has €21.6m in cash, leading to a €18.3m net cash position.

A Look At Naturhouse Health's Liabilities

Zooming in on the latest balance sheet data, we can see that Naturhouse Health had liabilities of €9.73m due within 12 months and liabilities of €6.82m due beyond that. Offsetting these obligations, it had cash of €21.6m as well as receivables valued at €8.04m due within 12 months. So it can boast €13.1m more liquid assets than total liabilities.

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

In fact Naturhouse Health's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Naturhouse Health'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, a company can only pay off debt with cold hard cash, not accounting profits. While Naturhouse Health 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. Over the last three years, Naturhouse Health recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Naturhouse Health has net cash of €18.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €14m, being 95% of its EBIT. So we are not troubled with Naturhouse Health's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Naturhouse Health (including 1 which shouldn't be ignored) .

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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