David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Napatech A/S (OB:NAPA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Napatech Carry?
You can click the graphic below for the historical numbers, but it shows that Napatech had ø32.9m of debt in December 2019, down from ø44.7m, one year before. But on the other hand it also has ø64.3m in cash, leading to a ø31.4m net cash position.
How Healthy Is Napatech's Balance Sheet?
We can see from the most recent balance sheet that Napatech had liabilities of ø65.4m falling due within a year, and liabilities of ø18.8m due beyond that. Offsetting these obligations, it had cash of ø64.3m as well as receivables valued at ø32.7m due within 12 months. So it actually has ø12.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Napatech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Napatech boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Napatech reported revenue of ø171m, which is a gain of 61%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Napatech?
While Napatech lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ø13m. 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. We think its revenue growth of 61% is a good sign. We'd see further strong growth as an optimistic indication. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Napatech (of which 1 shouldn't be ignored!) 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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