Is Next Fifteen Communications Group (LON:NFC) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Next Fifteen Communications Group plc (LON:NFC) does carry debt. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Next Fifteen Communications Group

How Much Debt Does Next Fifteen Communications Group Carry?

You can click the graphic below for the historical numbers, but it shows that Next Fifteen Communications Group had UK£20.7m of debt in July 2021, down from UK£35.2m, one year before. But on the other hand it also has UK£27.3m in cash, leading to a UK£6.62m net cash position.

How Strong Is Next Fifteen Communications Group's Balance Sheet?

We can see from the most recent balance sheet that Next Fifteen Communications Group had liabilities of UK£184.6m falling due within a year, and liabilities of UK£70.9m due beyond that. On the other hand, it had cash of UK£27.3m and UK£116.4m worth of receivables due within a year. So its liabilities total UK£111.8m more than the combination of its cash and short-term receivables.

Since publicly traded Next Fifteen Communications Group shares are worth a total of UK£1.15b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Next Fifteen Communications Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Next Fifteen Communications Group has boosted its EBIT by 99%, thus reducing the spectre of future debt repayments. 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 Next Fifteen Communications Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Next Fifteen Communications Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Next Fifteen Communications Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Next Fifteen Communications Group has UK£6.62m in net cash. The cherry on top was that in converted 210% of that EBIT to free cash flow, bringing in UK£55m. So we don't think Next Fifteen Communications Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Next Fifteen Communications Group , and understanding them should be part of your investment process.

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.

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.

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