Does Napatech (OB:NAPA) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Napatech A/S (OB:NAPA) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Napatech

What Is Napatech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Napatech had kr.11.4m of debt in September 2021, down from kr.21.4m, one year before. But on the other hand it also has kr.40.6m in cash, leading to a kr.29.1m net cash position.

How Strong Is Napatech's Balance Sheet?

The latest balance sheet data shows that Napatech had liabilities of kr.34.4m due within a year, and liabilities of kr.10.7m falling due after that. Offsetting these obligations, it had cash of kr.40.6m as well as receivables valued at kr.32.3m due within 12 months. So it can boast kr.27.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Napatech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Napatech boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Napatech grew its EBIT by 97% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Napatech 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. Napatech 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 last three years, Napatech recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Napatech has kr.29.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -kr.9.2m, being 91% of its EBIT. So we don't think Napatech's use of debt is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Napatech (including 1 which can't be ignored) .

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.