Is Nexgram Holdings Berhad (KLSE:NEXGRAM) A Risky Investment?

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 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?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Nexgram Holdings Berhad

How Much Debt Does Nexgram Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Nexgram Holdings Berhad had debt of RM17.6m at the end of April 2022, a reduction from RM79.6m over a year. But on the other hand it also has RM23.1m in cash, leading to a RM5.55m net cash position.

How Strong Is Nexgram Holdings Berhad's Balance Sheet?

According to the last reported balance sheet, Nexgram Holdings Berhad had liabilities of RM31.7m due within 12 months, and liabilities of RM10.1m due beyond 12 months. On the other hand, it had cash of RM23.1m and RM32.6m worth of receivables due within a year. So it actually has RM13.9m more liquid assets than total liabilities.

This luscious liquidity implies that Nexgram Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Nexgram Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nexgram Holdings Berhad'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.

Over 12 months, Nexgram Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM26m, which is a fall of 71%. To be frank that doesn't bode well.

So How Risky Is Nexgram Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Nexgram Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM12m of cash and made a loss of RM8.6m. Given it only has net cash of RM5.55m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 3 warning signs for Nexgram Holdings Berhad (2 are a bit unpleasant) you should be aware of.

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.