Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Philippos Nakas S.A. (ATH:NAKAS) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
What Is Philippos Nakas's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Philippos Nakas had €4.40m of debt, an increase on €4.02m, over one year. However, it does have €4.48m in cash offsetting this, leading to net cash of €81.6k.
How Healthy Is Philippos Nakas' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Philippos Nakas had liabilities of €5.19m due within 12 months and liabilities of €6.19m due beyond that. Offsetting this, it had €4.48m in cash and €2.89m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.02m.
Philippos Nakas has a market capitalization of €15.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Philippos Nakas boasts net cash, so it's fair to say it does not have a heavy debt load!
We note that Philippos Nakas grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Philippos Nakas'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Philippos Nakas 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, Philippos Nakas actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although Philippos Nakas's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €81.6k. The cherry on top was that in converted 185% of that EBIT to free cash flow, bringing in €2.8m. So is Philippos Nakas's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Philippos Nakas 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.
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.
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