Here's Why Navamedic (OB:NAVA) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Navamedic ASA (OB:NAVA) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for Navamedic

What Is Navamedic's Net Debt?

As you can see below, at the end of December 2021, Navamedic had kr39.0m of debt, up from kr20.9m a year ago. Click the image for more detail. But on the other hand it also has kr52.6m in cash, leading to a kr13.6m net cash position.

How Healthy Is Navamedic's Balance Sheet?

The latest balance sheet data shows that Navamedic had liabilities of kr126.0m due within a year, and liabilities of kr53.0m falling due after that. Offsetting these obligations, it had cash of kr52.6m as well as receivables valued at kr91.0m due within 12 months. So it has liabilities totalling kr35.3m more than its cash and near-term receivables, combined.

Since publicly traded Navamedic shares are worth a total of kr467.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Navamedic boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Navamedic improved its EBIT from a last year's loss to a positive kr11m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Navamedic can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Navamedic 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. Considering the last year, Navamedic actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Navamedic has kr13.6m in net cash. So although we see some areas for improvement, we're not too worried about Navamedic's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Navamedic that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.