Is Nexpe Participações (BVMF:NEXP3) Using Too Much 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.' 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. Importantly, Nexpe Participações S.A. (BVMF:NEXP3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nexpe Participações

What Is Nexpe Participações's Net Debt?

As you can see below, at the end of September 2022, Nexpe Participações had R$58.2m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has R$30.2m in cash leading to net debt of about R$28.0m.

How Healthy Is Nexpe Participações' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nexpe Participações had liabilities of R$111.6m due within 12 months and liabilities of R$122.9m due beyond that. On the other hand, it had cash of R$30.2m and R$25.5m worth of receivables due within a year. So its liabilities total R$178.8m more than the combination of its cash and short-term receivables.

Having regard to Nexpe Participações' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the R$25.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Nexpe Participações has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nexpe Participações 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.

Over 12 months, Nexpe Participações made a loss at the EBIT level, and saw its revenue drop to R$119m, which is a fall of 20%. To be frank that doesn't bode well.

Caveat Emptor

While Nexpe Participações's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at R$36m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled R$104m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Nexpe Participações you should be aware of, and 2 of them don't sit too well with us.

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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