Would NextSource Materials (TSE:NEXT) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 NextSource Materials Inc. (TSE:NEXT) does use debt in its business. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is NextSource Materials's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 NextSource Materials had debt of US$15.4m, up from none in one year. However, it does have US$3.28m in cash offsetting this, leading to net debt of about US$12.2m.

How Healthy Is NextSource Materials' Balance Sheet?

We can see from the most recent balance sheet that NextSource Materials had liabilities of US$23.8m falling due within a year, and liabilities of US$19.5m due beyond that. Offsetting these obligations, it had cash of US$3.28m as well as receivables valued at US$483.4k due within 12 months. So it has liabilities totalling US$39.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since NextSource Materials has a market capitalization of US$71.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NextSource Materials 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.

View our latest analysis for NextSource Materials

While it hasn't made a profit, at least NextSource Materials booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

Importantly, NextSource Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$16m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$31m in negative free cash flow over the last twelve months. So in short it's a really 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. For instance, we've identified 5 warning signs for NextSource Materials (2 are significant) 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.