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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Optiemus Infracom Limited (NSE:OPTIEMUS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

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What Is Optiemus Infracom's Debt?

As you can see below, at the end of September 2022, Optiemus Infracom had ₹863.5m of debt, up from ₹348.5m a year ago. Click the image for more detail. However, it also had ₹371.7m in cash, and so its net debt is ₹491.8m.

How Healthy Is Optiemus Infracom's Balance Sheet?

The latest balance sheet data shows that Optiemus Infracom had liabilities of ₹4.18b due within a year, and liabilities of ₹520.2m falling due after that. On the other hand, it had cash of ₹371.7m and ₹3.09b worth of receivables due within a year. So it has liabilities totalling ₹1.24b more than its cash and near-term receivables, combined.

Of course, Optiemus Infracom has a market capitalization of ₹18.4b, so these liabilities are probably manageable. 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 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 reported revenue of ₹8.3b, which is a gain of 206%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Optiemus Infracom's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹207m at the EBIT level. 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. 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 ₹581m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Be aware that Optiemus Infracom is showing 2 warning signs in our investment analysis , you should know about...

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.