NAHL Group (LON:NAH) Is Making Moderate Use Of Debt

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.' 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 NAHL Group plc (LON:NAH) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 NAHL Group

What Is NAHL Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 NAHL Group had debt of UK£21.9m, up from UK£19.7m in one year. However, because it has a cash reserve of UK£3.38m, its net debt is less, at about UK£18.5m.

A Look At NAHL Group's Liabilities

According to the last reported balance sheet, NAHL Group had liabilities of UK£16.4m due within 12 months, and liabilities of UK£23.6m due beyond 12 months. On the other hand, it had cash of UK£3.38m and UK£33.6m worth of receivables due within a year. So its liabilities total UK£3.01m more than the combination of its cash and short-term receivables.

Since publicly traded NAHL Group shares are worth a total of UK£21.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is NAHL Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, NAHL Group made a loss at the EBIT level, and saw its revenue drop to UK£46m, which is a fall of 8.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, NAHL Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost UK£154k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of UK£4.9m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with NAHL Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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