Nexus Infrastructure (LON:NEXS) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Nexus Infrastructure plc (LON:NEXS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nexus Infrastructure

What Is Nexus Infrastructure's Debt?

The image below, which you can click on for greater detail, shows that Nexus Infrastructure had debt of UK£10.6m at the end of March 2022, a reduction from UK£11.9m over a year. However, its balance sheet shows it holds UK£23.1m in cash, so it actually has UK£12.5m net cash.

A Look At Nexus Infrastructure's Liabilities

Zooming in on the latest balance sheet data, we can see that Nexus Infrastructure had liabilities of UK£77.3m due within 12 months and liabilities of UK£10.2m due beyond that. On the other hand, it had cash of UK£23.1m and UK£70.0m worth of receivables due within a year. So it can boast UK£5.69m 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. Simply put, the fact that Nexus Infrastructure has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Nexus Infrastructure made a loss at the EBIT level, last year, it was also good to see that it generated UK£3.8m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nexus Infrastructure can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nexus Infrastructure 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. Over the last year, Nexus Infrastructure saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nexus Infrastructure has UK£12.5m in net cash and a decent-looking balance sheet. So we are not troubled with Nexus Infrastructure's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Nexus Infrastructure (including 1 which is a bit unpleasant) .

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.