Is Nxtdigital (NSE:NXTDIGITAL) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Nxtdigital Limited (NSE:NXTDIGITAL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nxtdigital

What Is Nxtdigital's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Nxtdigital had ₹12.2b of debt, an increase on ₹11.0b, over one year. However, it also had ₹1.47b in cash, and so its net debt is ₹10.7b.

A Look At Nxtdigital's Liabilities

The latest balance sheet data shows that Nxtdigital had liabilities of ₹13.7b due within a year, and liabilities of ₹3.91b falling due after that. On the other hand, it had cash of ₹1.47b and ₹1.94b worth of receivables due within a year. So its liabilities total ₹14.2b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₹11.9b, we think shareholders really should watch Nxtdigital's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nxtdigital will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Nxtdigital made a loss at the EBIT level, and saw its revenue drop to ₹9.3b, which is a fall of 6.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Nxtdigital produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹282m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₹2.3b in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Nxtdigital (1 is significant) you should be aware of.

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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