Here's Why Nexgram Holdings Berhad (KLSE:NEXGRAM) Can Afford Some Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Nexgram Holdings Berhad

What Is Nexgram Holdings Berhad's Net Debt?

As you can see below, Nexgram Holdings Berhad had RM68.1m of debt at October 2020, down from RM72.6m a year prior. However, it does have RM28.3m in cash offsetting this, leading to net debt of about RM39.8m.

How Strong Is Nexgram Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nexgram Holdings Berhad had liabilities of RM83.9m due within 12 months and liabilities of RM17.2m due beyond that. Offsetting this, it had RM28.3m in cash and RM48.4m in receivables that were due within 12 months. So it has liabilities totalling RM24.3m more than its cash and near-term receivables, combined.

Of course, Nexgram Holdings Berhad has a market capitalization of RM123.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Over 12 months, Nexgram Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM42m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Nexgram Holdings Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM66m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM33m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for Nexgram Holdings Berhad (2 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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