Is Napatech (OB:NAPA) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Napatech A/S (OB:NAPA) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Napatech

How Much Debt Does Napatech Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Napatech had debt of kr.44.8m, up from kr.26.3m in one year. However, its balance sheet shows it holds kr.56.0m in cash, so it actually has kr.11.3m net cash.

How Strong Is Napatech's Balance Sheet?

We can see from the most recent balance sheet that Napatech had liabilities of kr.70.9m falling due within a year, and liabilities of kr.24.6m due beyond that. On the other hand, it had cash of kr.56.0m and kr.33.4m worth of receivables due within a year. So it has liabilities totalling kr.6.08m more than its cash and near-term receivables, combined.

This state of affairs indicates that Napatech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr.636.6m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Napatech also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Napatech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Napatech had a loss before interest and tax, and actually shrunk its revenue by 23%, to kr.146m. To be frank that doesn't bode well.

So How Risky Is Napatech?

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 Napatech had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr.48m of cash and made a loss of kr.65m. Given it only has net cash of kr.11.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 3 warning signs for Napatech that you should be aware of before investing here.

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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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.