These 4 Measures Indicate That Optiemus Infracom (NSE:OPTIEMUS) Is Using Debt Extensively

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 note that Optiemus Infracom Limited (NSE:OPTIEMUS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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

What Is Optiemus Infracom's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Optiemus Infracom had ₹546.9m of debt, an increase on ₹432.0m, over one year. However, it does have ₹180.9m in cash offsetting this, leading to net debt of about ₹366.0m.

How Healthy Is Optiemus Infracom's Balance Sheet?

According to the last reported balance sheet, Optiemus Infracom had liabilities of ₹4.61b due within 12 months, and liabilities of ₹686.3m due beyond 12 months. On the other hand, it had cash of ₹180.9m and ₹3.91b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.20b.

Since publicly traded Optiemus Infracom shares are worth a total of ₹23.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 1.5 times EBITDA, it is initially surprising to see that Optiemus Infracom's EBIT has low interest coverage of 2.0 times. So one way or the other, it's clear the debt levels are not trivial. We also note that Optiemus Infracom improved its EBIT from a last year's loss to a positive ₹118m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Optiemus Infracom's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Optiemus Infracom burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

While Optiemus Infracom's interest cover makes us cautious about it, its track record of converting EBIT to free cash flow is no better. But its not so bad at staying on top of its total liabilities. When we consider all the factors discussed, it seems to us that Optiemus Infracom is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Optiemus Infracom (of which 2 are a bit unpleasant!) 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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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.