We Think Navamedic (OB:NAVA) Can Stay On Top Of Its 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. As with many other companies Navamedic ASA (OB:NAVA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Navamedic's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Navamedic had kr20.1m of debt in June 2021, down from kr26.7m, one year before. However, its balance sheet shows it holds kr21.0m in cash, so it actually has kr842.0k net cash.

A Look At Navamedic's Liabilities

The latest balance sheet data shows that Navamedic had liabilities of kr111.3m due within a year, and liabilities of kr28.8m falling due after that. On the other hand, it had cash of kr21.0m and kr45.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr73.6m.

Of course, Navamedic has a market capitalization of kr369.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Navamedic also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Navamedic turned things around in the last 12 months, delivering and EBIT of kr2.4m. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last year, Navamedic burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Navamedic's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr842.0k. So we are not troubled with Navamedic's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Navamedic you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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