NextgenInc (TSE:3842) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. We can see that Nextgen,Inc. (TSE:3842) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for NextgenInc

How Much Debt Does NextgenInc Carry?

As you can see below, NextgenInc had JP¥473.0m of debt at March 2024, down from JP¥516.0m a year prior. However, it does have JP¥1.26b in cash offsetting this, leading to net cash of JP¥789.0m.

How Healthy Is NextgenInc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NextgenInc had liabilities of JP¥1.01b due within 12 months and liabilities of JP¥311.0m due beyond that. On the other hand, it had cash of JP¥1.26b and JP¥967.0m worth of receivables due within a year. So it can boast JP¥911.0m more liquid assets than total liabilities.

This surplus liquidity suggests that NextgenInc's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that NextgenInc has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that NextgenInc grew its EBIT by 484% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NextgenInc will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NextgenInc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, NextgenInc recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NextgenInc has net cash of JP¥789.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 484% over the last year. So we don't think NextgenInc's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with NextgenInc , and understanding them should be part of your investment process.

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.

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