Health Check: How Prudently Does Nexgram Holdings Berhad (KLSE:NEXGRAM) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Nexgram Holdings Berhad (KLSE:NEXGRAM) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?

You can click the graphic below for the historical numbers, but it shows that as of April 2023 Nexgram Holdings Berhad had RM21.3m of debt, an increase on RM17.6m, over one year. However, it also had RM13.8m in cash, and so its net debt is RM7.50m.

How Healthy Is Nexgram Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Nexgram Holdings Berhad had liabilities of RM54.5m falling due within a year, and liabilities of RM12.7m due beyond that. Offsetting this, it had RM13.8m in cash and RM10.8m in receivables that were due within 12 months. So its liabilities total RM42.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM13.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Nexgram Holdings Berhad would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nexgram Holdings Berhad 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 Nexgram Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to RM37m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Nexgram Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM17m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized RM2.1m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Be aware that Nexgram Holdings Berhad is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

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.