Nafpaktos Textile Industry (ATH:NAYP) Has A Pretty Healthy Balance Sheet

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 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. We note that Nafpaktos Textile Industry S.A. (ATH:NAYP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nafpaktos Textile Industry

How Much Debt Does Nafpaktos Textile Industry Carry?

As you can see below, at the end of June 2020, Nafpaktos Textile Industry had €1.63m of debt, up from €1.34m a year ago. Click the image for more detail. But on the other hand it also has €2.31m in cash, leading to a €677.2k net cash position.

How Strong Is Nafpaktos Textile Industry's Balance Sheet?

We can see from the most recent balance sheet that Nafpaktos Textile Industry had liabilities of €1.54m falling due within a year, and liabilities of €1.12m due beyond that. On the other hand, it had cash of €2.31m and €2.42m worth of receivables due within a year. So it actually has €2.06m more liquid assets than total liabilities.

This luscious liquidity implies that Nafpaktos Textile Industry's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Nafpaktos Textile Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Nafpaktos Textile Industry's EBIT was down 22% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nafpaktos Textile Industry will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nafpaktos Textile Industry 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. During the last three years, Nafpaktos Textile Industry produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Nafpaktos Textile Industry has €677.2k in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €390k, being 74% of its EBIT. So we are not troubled with Nafpaktos Textile Industry's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Nafpaktos Textile Industry you should be aware of, and 1 of them is significant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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