Does Optiemus Infracom (NSE:OPTIEMUS) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Optiemus Infracom Limited (NSE:OPTIEMUS) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Optiemus Infracom

How Much Debt Does Optiemus Infracom Carry?

The image below, which you can click on for greater detail, shows that Optiemus Infracom had debt of ₹2.17b at the end of September 2020, a reduction from ₹2.27b over a year. However, it also had ₹269.4m in cash, and so its net debt is ₹1.90b.

How Strong Is Optiemus Infracom's Balance Sheet?

According to the last reported balance sheet, Optiemus Infracom had liabilities of ₹1.46b due within 12 months, and liabilities of ₹1.80b due beyond 12 months. Offsetting these obligations, it had cash of ₹269.4m as well as receivables valued at ₹2.33b due within 12 months. So its liabilities total ₹651.8m more than the combination of its cash and short-term receivables.

Given Optiemus Infracom has a market capitalization of ₹7.83b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Optiemus Infracom will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Optiemus Infracom had a loss before interest and tax, and actually shrunk its revenue by 71%, to ₹2.0b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Optiemus Infracom's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹385m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹666m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Optiemus Infracom (1 is a bit concerning) you should be aware of.

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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