Is Nextware (TYO:4814) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Nextware Ltd. (TYO:4814) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

View our latest analysis for Nextware

What Is Nextware's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Nextware had debt of JP¥268.0m, up from JP¥211.0m in one year. However, it does have JP¥348.0m in cash offsetting this, leading to net cash of JP¥80.0m.

A Look At Nextware's Liabilities

We can see from the most recent balance sheet that Nextware had liabilities of JP¥554.0m falling due within a year, and liabilities of JP¥100.0m due beyond that. On the other hand, it had cash of JP¥348.0m and JP¥402.0m worth of receivables due within a year. So it can boast JP¥96.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Nextware could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nextware boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nextware'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.

In the last year Nextware had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to JP¥3.0b. We would much prefer see growth.

So How Risky Is Nextware?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Nextware lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥166m of cash and made a loss of JP¥67m. However, it has net cash of JP¥80.0m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 2 warning signs for Nextware you should be aware of, and 1 of them makes us a bit uncomfortable.

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. 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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