Is Nacon (EPA:NACON) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Nacon S.A. (EPA:NACON) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nacon

What Is Nacon's Debt?

As you can see below, Nacon had €65.2m of debt at September 2020, down from €68.1m a year prior. However, it does have €116.0m in cash offsetting this, leading to net cash of €50.7m.

How Strong Is Nacon's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nacon had liabilities of €76.5m due within 12 months and liabilities of €48.0m due beyond that. On the other hand, it had cash of €116.0m and €63.5m worth of receivables due within a year. So it can boast €55.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Nacon could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nacon has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Nacon has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. 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 Nacon 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nacon 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. During the last two years, Nacon burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Nacon has net cash of €50.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. So we don't have any problem with Nacon's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Nacon, you may well want to click here to check an interactive graph of its earnings per share history.

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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