Would Napatech (OB:NAPA) Be Better Off With Less 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.' 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. Importantly, Napatech A/S (OB:NAPA) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Napatech

How Much Debt Does Napatech Carry?

The chart below, which you can click on for greater detail, shows that Napatech had kr.44.1m in debt in December 2023; about the same as the year before. However, because it has a cash reserve of kr.42.4m, its net debt is less, at about kr.1.74m.

A Look At Napatech's Liabilities

We can see from the most recent balance sheet that Napatech had liabilities of kr.61.6m falling due within a year, and liabilities of kr.20.9m due beyond that. Offsetting this, it had kr.42.4m in cash and kr.59.4m in receivables that were due within 12 months. So it can boast kr.19.1m more liquid assets than total liabilities.

Having regard to Napatech's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr.1.27b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Napatech has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Napatech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Napatech reported revenue of kr.183m, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Napatech had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr.33m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. To that end, you should be aware of the 1 warning sign we've spotted with Napatech .

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.