Nedap (AMS:NEDAP) Could Easily Take On More 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. We note that Nedap N.V. (AMS:NEDAP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nedap

How Much Debt Does Nedap Carry?

The image below, which you can click on for greater detail, shows that Nedap had debt of €14.2m at the end of June 2020, a reduction from €28.2m over a year. But it also has €24.1m in cash to offset that, meaning it has €9.96m net cash.

A Look At Nedap's Liabilities

Zooming in on the latest balance sheet data, we can see that Nedap had liabilities of €27.7m due within 12 months and liabilities of €17.4m due beyond that. Offsetting this, it had €24.1m in cash and €32.0m in receivables that were due within 12 months. So it can boast €10.9m more liquid assets than total liabilities.

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

But the other side of the story is that Nedap saw its EBIT decline by 3.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Nedap recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Nedap has €9.96m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €19m, being 78% of its EBIT. So we don't think Nedap's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nedap is showing 2 warning signs in our investment analysis , you should know about...

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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