Is Navamedic (OB:NAVA) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Navamedic ASA (OB:NAVA) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 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, Navamedic had kr20.9m of debt at December 2020, down from kr23.6m a year prior. But on the other hand it also has kr39.6m in cash, leading to a kr18.7m net cash position.

How Strong Is Navamedic's Balance Sheet?

We can see from the most recent balance sheet that Navamedic had liabilities of kr105.5m falling due within a year, and liabilities of kr25.1m due beyond that. On the other hand, it had cash of kr39.6m and kr28.6m worth of receivables due within a year. So it has liabilities totalling kr62.3m more than its cash and near-term receivables, combined.

Since publicly traded Navamedic shares are worth a total of kr441.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Navamedic boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Navamedic'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.

In the last year Navamedic wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to kr210m. 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 we do note that Navamedic had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr10.0m and booked a kr16m accounting loss. But the saving grace is the kr18.7m 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. 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. Be aware that Navamedic is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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This article by Simply Wall St is general in nature. 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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