Is Neogrid Participações (BVMF:NGRD3) Using Debt In A Risky Way?

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 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. We note that Neogrid Participações S.A. (BVMF:NGRD3) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Neogrid Participações

What Is Neogrid Participações's Net Debt?

The image below, which you can click on for greater detail, shows that Neogrid Participações had debt of R$9.38m at the end of June 2024, a reduction from R$44.0m over a year. But it also has R$166.7m in cash to offset that, meaning it has R$157.4m net cash.

How Healthy Is Neogrid Participações' Balance Sheet?

The latest balance sheet data shows that Neogrid Participações had liabilities of R$104.6m due within a year, and liabilities of R$94.6m falling due after that. Offsetting this, it had R$166.7m in cash and R$75.1m in receivables that were due within 12 months. So it actually has R$42.6m more liquid assets than total liabilities.

It's good to see that Neogrid Participações has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Neogrid Participações saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Neogrid Participações?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Neogrid Participações had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through R$2.0m of cash and made a loss of R$6.2m. With only R$157.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Neogrid Participações (1 is a bit unpleasant!) that you should be aware of before investing here.

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.