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. We note that Nixu Oyj (HEL:NIXU) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Nixu Oyj
What Is Nixu Oyj's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Nixu Oyj had €5.90m of debt in December 2020, down from €7.48m, one year before. But it also has €6.03m in cash to offset that, meaning it has €127.0k net cash.
A Look At Nixu Oyj's Liabilities
Zooming in on the latest balance sheet data, we can see that Nixu Oyj had liabilities of €19.8m due within 12 months and liabilities of €6.92m due beyond that. Offsetting this, it had €6.03m in cash and €13.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.67m.
Since publicly traded Nixu Oyj shares are worth a total of €72.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Nixu Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.
We also note that Nixu Oyj improved its EBIT from a last year's loss to a positive €1.5m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nixu Oyj 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nixu Oyj 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. Happily for any shareholders, Nixu Oyj actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While Nixu Oyj does have more liabilities than liquid assets, it also has net cash of €127.0k. And it impressed us with free cash flow of €5.1m, being 338% of its EBIT. So we are not troubled with Nixu Oyj'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. For example - Nixu Oyj has 1 warning sign we think you should be aware of.
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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About HLSE:NIXU
Nixu Oyj
Nixu Oyj operates as a cybersecurity services company in Finland, Sweden, Denmark, Benelux, Norway, and internationally.
Excellent balance sheet and slightly overvalued.