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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Napatech A/S (OB:NAPA) does use debt in its business. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Napatech. Read for free now.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Napatech's Net Debt?

The chart below, which you can click on for greater detail, shows that Napatech had kr.42.9m in debt in December 2024; about the same as the year before. But it also has kr.64.3m in cash to offset that, meaning it has kr.21.4m net cash.

How Healthy Is Napatech's Balance Sheet?

We can see from the most recent balance sheet that Napatech had liabilities of kr.57.2m falling due within a year, and liabilities of kr.19.3m due beyond that. Offsetting these obligations, it had cash of kr.64.3m as well as receivables valued at kr.49.5m due within 12 months. So it actually has kr.37.3m more liquid assets than total liabilities.

This surplus suggests that Napatech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Napatech 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 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.

View our latest analysis for Napatech

Over 12 months, Napatech made a loss at the EBIT level, and saw its revenue drop to kr.116m, which is a fall of 36%. 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 the fact is that over the last twelve months Napatech lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr.114m of cash and made a loss of kr.111m. With only kr.21.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Napatech is showing 2 warning signs in our investment analysis , you should know about...

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. 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.