Optiemus Infracom (NSE:OPTIEMUS) Is Carrying A Fair Bit Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Optiemus Infracom Limited (NSE:OPTIEMUS) makes use of debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Optiemus Infracom

What Is Optiemus Infracom's Net Debt?

As you can see below, Optiemus Infracom had ₹432.0m of debt at March 2022, down from ₹1.02b a year prior. On the flip side, it has ₹315.3m in cash leading to net debt of about ₹116.7m.

How Strong Is Optiemus Infracom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Optiemus Infracom had liabilities of ₹2.16b due within 12 months and liabilities of ₹204.2m due beyond that. Offsetting this, it had ₹315.3m in cash and ₹2.73b in receivables that were due within 12 months. So it actually has ₹677.1m more liquid assets than total liabilities.

This surplus suggests that Optiemus Infracom has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Optiemus Infracom has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Optiemus Infracom 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.

In the last year Optiemus Infracom wasn't profitable at an EBIT level, but managed to grow its revenue by 160%, to ₹4.7b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Optiemus Infracom managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₹253m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. Having said that the rate of revenue growth will likely impress the market, greatly facilitating any potential capital raising, if required. Despite that strong positive, this one could still be considered a bit too risky, by some. 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 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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