Is Nedap (AMS:NEDAP) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Nedap N.V. (AMS:NEDAP) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Nedap

What Is Nedap's Debt?

As you can see below, Nedap had €14.0m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €22.8m in cash, so it actually has €8.80m net cash.

How Strong Is Nedap's Balance Sheet?

According to the last reported balance sheet, Nedap had liabilities of €34.5m due within 12 months, and liabilities of €17.6m due beyond 12 months. Offsetting these obligations, it had cash of €22.8m as well as receivables valued at €34.1m due within 12 months. So it actually has €4.89m more liquid assets than total liabilities.

This state of affairs indicates that Nedap's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €404.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Nedap boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Nedap has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nedap can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Nedap 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, Nedap actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Nedap has €8.80m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in €28m. So is Nedap's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Nedap 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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