Does Nexus Infrastructure (LON:NEXS) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nexus Infrastructure plc (LON:NEXS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nexus Infrastructure

What Is Nexus Infrastructure's Debt?

As you can see below, at the end of September 2020, Nexus Infrastructure had UK£9.36m of debt, up from UK£4.75m a year ago. Click the image for more detail. However, it does have UK£32.1m in cash offsetting this, leading to net cash of UK£22.8m.

How Healthy Is Nexus Infrastructure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nexus Infrastructure had liabilities of UK£63.7m due within 12 months and liabilities of UK£10.3m due beyond that. On the other hand, it had cash of UK£32.1m and UK£51.0m worth of receivables due within a year. So it can boast UK£9.15m more liquid assets than total liabilities.

This short term liquidity is a sign that Nexus Infrastructure could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nexus Infrastructure boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Nexus Infrastructure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Nexus Infrastructure made a loss at the EBIT level, and saw its revenue drop to UK£126m, which is a fall of 19%. We would much prefer see growth.

So How Risky Is Nexus Infrastructure?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Nexus Infrastructure had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£6.9m of cash and made a loss of UK£2.4m. With only UK£22.8m 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. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Nexus Infrastructure (of which 1 makes us a bit uncomfortable!) 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. 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.
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