Is Nxtdigital (NSE:NXTDIGITAL) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Nxtdigital Limited (NSE:NXTDIGITAL) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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.

View our latest analysis for Nxtdigital

What Is Nxtdigital's Net Debt?

The image below, which you can click on for greater detail, shows that Nxtdigital had debt of ₹11.6b at the end of September 2021, a reduction from ₹12.2b over a year. However, because it has a cash reserve of ₹1.64b, its net debt is less, at about ₹9.93b.

How Healthy Is Nxtdigital's Balance Sheet?

According to the last reported balance sheet, Nxtdigital had liabilities of ₹14.6b due within 12 months, and liabilities of ₹3.64b due beyond 12 months. On the other hand, it had cash of ₹1.64b and ₹1.80b worth of receivables due within a year. So it has liabilities totalling ₹14.8b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹10.3b, we think shareholders really should watch Nxtdigital's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Nxtdigital wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to ₹10b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Nxtdigital had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹88m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹588m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nxtdigital you should know about.

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.