Is Navamedic (OB:NAVA) Using Debt Sensibly?

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.' 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 can see that Navamedic ASA (OB:NAVA) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Navamedic

How Much Debt Does Navamedic Carry?

You can click the graphic below for the historical numbers, but it shows that Navamedic had kr26.3m of debt in September 2020, down from kr30.5m, one year before. But it also has kr32.2m in cash to offset that, meaning it has kr5.90m net cash.

A Look At Navamedic's Liabilities

Zooming in on the latest balance sheet data, we can see that Navamedic had liabilities of kr111.9m due within 12 months and liabilities of kr30.0m due beyond that. Offsetting this, it had kr32.2m in cash and kr41.0m in receivables that were due within 12 months. So it has liabilities totalling kr68.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Navamedic has a market capitalization of kr282.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Navamedic boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Navamedic will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Navamedic wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to kr202m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Navamedic?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Navamedic lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr20m of cash and made a loss of kr22m. But the saving grace is the kr5.90m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Navamedic (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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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