Is Neogrid Participações (BVMF:NGRD3) A Risky Investment?

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 Neogrid Participações S.A. (BVMF:NGRD3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Neogrid Participações

How Much Debt Does Neogrid Participações Carry?

You can click the graphic below for the historical numbers, but it shows that Neogrid Participações had R$10.2m of debt in March 2024, down from R$50.7m, one year before. However, it does have R$169.2m in cash offsetting this, leading to net cash of R$159.0m.

A Look At Neogrid Participações' Liabilities

The latest balance sheet data shows that Neogrid Participações had liabilities of R$99.1m due within a year, and liabilities of R$100.7m falling due after that. Offsetting these obligations, it had cash of R$169.2m as well as receivables valued at R$84.4m due within 12 months. So it can boast R$53.7m more liquid assets than total liabilities.

This surplus suggests that Neogrid Participações is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Neogrid Participações has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Neogrid Participações 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.

Over 12 months, Neogrid Participações saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Neogrid Participações?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Neogrid Participações lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through R$9.6m of cash and made a loss of R$4.3m. Given it only has net cash of R$159.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with Neogrid Participações (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com