Does Nexgram Holdings Berhad (KLSE:NEXGRAM) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Nexgram Holdings Berhad (KLSE:NEXGRAM) does use debt in its business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nexgram Holdings Berhad

What Is Nexgram Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that Nexgram Holdings Berhad had debt of RM21.3m at the end of January 2023, a reduction from RM22.8m over a year. However, it also had RM17.5m in cash, and so its net debt is RM3.82m.

A Look At Nexgram Holdings Berhad's Liabilities

According to the last reported balance sheet, Nexgram Holdings Berhad had liabilities of RM57.2m due within 12 months, and liabilities of RM14.5m due beyond 12 months. On the other hand, it had cash of RM17.5m and RM8.89m worth of receivables due within a year. So it has liabilities totalling RM45.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM15.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Nexgram Holdings Berhad would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nexgram Holdings Berhad 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.

Over 12 months, Nexgram Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM36m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

While Nexgram Holdings Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable RM20m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized RM2.2m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. To that end, you should be aware of the 2 warning signs we've spotted with Nexgram Holdings Berhad .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.