Naturhouse Health (BME:NTH) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Naturhouse Health, S.A. (BME:NTH) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Naturhouse Health

How Much Debt Does Naturhouse Health Carry?

The image below, which you can click on for greater detail, shows that Naturhouse Health had debt of €2.54m at the end of June 2022, a reduction from €6.52m over a year. However, its balance sheet shows it holds €19.9m in cash, so it actually has €17.3m net cash.

A Look At Naturhouse Health's Liabilities

Zooming in on the latest balance sheet data, we can see that Naturhouse Health had liabilities of €11.1m due within 12 months and liabilities of €5.36m due beyond that. On the other hand, it had cash of €19.9m and €7.35m worth of receivables due within a year. So it can boast €10.7m 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.

The modesty of its debt load may become crucial for Naturhouse Health if management cannot prevent a repeat of the 23% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Naturhouse Health can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Naturhouse Health has net cash of €17.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €12m, being 88% of its EBIT. So we don't have any problem with Naturhouse Health's use of debt. 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. For instance, we've identified 4 warning signs for Naturhouse Health (3 can't be ignored) you should be aware of.

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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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.