Is NFI Group (TSE:NFI) 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 can see that NFI Group Inc. (TSE:NFI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NFI Group

What Is NFI Group's Net Debt?

The image below, which you can click on for greater detail, shows that NFI Group had debt of US$842.7m at the end of January 2022, a reduction from US$1.16b over a year. However, it does have US$77.3m in cash offsetting this, leading to net debt of about US$765.4m.

A Look At NFI Group's Liabilities

The latest balance sheet data shows that NFI Group had liabilities of US$604.6m due within a year, and liabilities of US$1.12b falling due after that. Offsetting this, it had US$77.3m in cash and US$417.9m in receivables that were due within 12 months. So it has liabilities totalling US$1.23b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$952.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 NFI Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, NFI Group made a loss at the EBIT level, and saw its revenue drop to US$2.3b, which is a fall of 2.8%. We would much prefer see growth.

Caveat Emptor

Importantly, NFI Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$23m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$14m. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for NFI Group (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.