Health Check: How Prudently Does NGS Group (STO:NGS) Use 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 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. As with many other companies NGS Group AB (publ) (STO:NGS) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for NGS Group

What Is NGS Group's Debt?

You can click the graphic below for the historical numbers, but it shows that NGS Group had kr20.8m of debt in June 2024, down from kr33.4m, one year before. However, it does have kr21.8m in cash offsetting this, leading to net cash of kr1.04m.

How Healthy Is NGS Group's Balance Sheet?

We can see from the most recent balance sheet that NGS Group had liabilities of kr65.7m falling due within a year, and liabilities of kr27.3m due beyond that. Offsetting these obligations, it had cash of kr21.8m as well as receivables valued at kr38.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr32.9m.

While this might seem like a lot, it is not so bad since NGS Group has a market capitalization of kr85.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, NGS Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NGS Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year NGS Group had a loss before interest and tax, and actually shrunk its revenue by 25%, to kr419m. That makes us nervous, to say the least.

So How Risky Is NGS Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NGS Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr7.6m of cash and made a loss of kr187m. While this does make the company a bit risky, it's important to remember it has net cash of kr1.04m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for NGS Group that you should be aware of.

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.