Does Natus Medical (NASDAQ:NTUS) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Natus Medical Incorporated (NASDAQ:NTUS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Natus Medical

What Is Natus Medical's Net Debt?

As you can see below, Natus Medical had US$36.5m of debt at March 2021, down from US$99.7m a year prior. However, its balance sheet shows it holds US$80.5m in cash, so it actually has US$44.0m net cash.

How Healthy Is Natus Medical's Balance Sheet?

The latest balance sheet data shows that Natus Medical had liabilities of US$136.5m due within a year, and liabilities of US$36.0m falling due after that. Offsetting this, it had US$80.5m in cash and US$91.3m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Natus Medical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$899.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Natus Medical 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 Natus Medical 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.

In the last year Natus Medical had a loss before interest and tax, and actually shrunk its revenue by 14%, to US$421m. We would much prefer see growth.

So How Risky Is Natus Medical?

Although Natus Medical had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$36m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 1 warning sign for Natus Medical that you should be aware of.

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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