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. Importantly, Nextedia S.A. (EPA:ALNXT) does carry debt. But the real question is whether this debt is making the company risky.
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Nextedia's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Nextedia had €7.01m of debt, an increase on €2.12m, over one year. But on the other hand it also has €7.41m in cash, leading to a €405.7k net cash position.
How Healthy Is Nextedia's Balance Sheet?
According to the last reported balance sheet, Nextedia had liabilities of €17.5m due within 12 months, and liabilities of €7.42m due beyond 12 months. Offsetting this, it had €7.41m in cash and €13.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.42m.
Since publicly traded Nextedia shares are worth a total of €38.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nextedia boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Nextedia has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nextedia'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nextedia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Nextedia produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Although Nextedia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €405.7k. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Nextedia's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Nextedia you should be aware of, and 1 of them is concerning.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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