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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 N.V. Nederlandsche Apparatenfabriek Nedap (AMS:NEDAP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for N.V. Nederlandsche Apparatenfabriek Nedap
What Is N.V. Nederlandsche Apparatenfabriek Nedap's Debt?
As you can see below, N.V. Nederlandsche Apparatenfabriek Nedap had €28.2m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had €2.41m in cash, and so its net debt is €25.8m.
How Strong Is N.V. Nederlandsche Apparatenfabriek Nedap's Balance Sheet?
The latest balance sheet data shows that N.V. Nederlandsche Apparatenfabriek Nedap had liabilities of €43.3m due within a year, and liabilities of €17.0m falling due after that. Offsetting this, it had €2.41m in cash and €35.6m in receivables that were due within 12 months. So its liabilities total €22.3m more than the combination of its cash and short-term receivables.
Since publicly traded N.V. Nederlandsche Apparatenfabriek Nedap shares are worth a total of €293.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.