Is Optiemus Infracom (NSE:OPTIEMUS) Using Too Much Debt?

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. Importantly, Optiemus Infracom Limited (NSE:OPTIEMUS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Optiemus Infracom

What Is Optiemus Infracom's Net Debt?

The image below, which you can click on for greater detail, shows that Optiemus Infracom had debt of ₹1.02b at the end of March 2021, a reduction from ₹2.39b over a year. However, because it has a cash reserve of ₹424.7m, its net debt is less, at about ₹598.7m.

How Healthy Is Optiemus Infracom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Optiemus Infracom had liabilities of ₹1.59b due within 12 months and liabilities of ₹45.9m due beyond that. Offsetting this, it had ₹424.7m in cash and ₹2.87b in receivables that were due within 12 months. So it can boast ₹1.66b more liquid assets than total liabilities.

This short term liquidity is a sign that Optiemus Infracom could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Optiemus Infracom'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, Optiemus Infracom made a loss at the EBIT level, and saw its revenue drop to ₹2.2b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

While Optiemus Infracom's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹927m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. For riskier companies like Optiemus Infracom I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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