Health Check: How Prudently Does Nxtdigital (NSE:NXTDIGITAL) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Nxtdigital Limited (NSE:NXTDIGITAL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. 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 Nxtdigital

How Much Debt Does Nxtdigital Carry?

As you can see below, Nxtdigital had ₹9.06b of debt at March 2022, down from ₹11.0b a year prior. However, it does have ₹559.9m in cash offsetting this, leading to net debt of about ₹8.50b.

How Healthy Is Nxtdigital's Balance Sheet?

We can see from the most recent balance sheet that Nxtdigital had liabilities of ₹11.5b falling due within a year, and liabilities of ₹3.70b due beyond that. On the other hand, it had cash of ₹559.9m and ₹1.77b worth of receivables due within a year. So it has liabilities totalling ₹12.9b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹12.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nxtdigital's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Nxtdigital reported revenue of ₹11b, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Nxtdigital had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹395m. 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 ₹2.9b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 3 warning signs with Nxtdigital (at least 2 which are significant) , 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.

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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.