NFI Group (TSE:NFI) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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 can see that NFI Group Inc. (TSE:NFI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NFI Group

What Is NFI Group's Net Debt?

The chart below, which you can click on for greater detail, shows that NFI Group had US$1.07b in debt in October 2022; about the same as the year before. However, it also had US$39.8m in cash, and so its net debt is US$1.03b.

How Strong Is NFI Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NFI Group had liabilities of US$684.3m due within 12 months and liabilities of US$1.31b due beyond that. On the other hand, it had cash of US$39.8m and US$339.5m worth of receivables due within a year. So it has liabilities totalling US$1.62b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$610.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, NFI Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year NFI Group had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$2.1b. We would much prefer see growth.

Caveat Emptor

While NFI Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$172m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$131m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - NFI Group has 2 warning signs we think you should be aware of.

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.