Is Nexgram Holdings Berhad (KLSE:NEXGRAM) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Nexgram Holdings Berhad (KLSE:NEXGRAM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Nexgram Holdings Berhad

What Is Nexgram Holdings Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nexgram Holdings Berhad had RM10.6m of debt in April 2020, down from RM55.4m, one year before. However, its balance sheet shows it holds RM18.5m in cash, so it actually has RM7.93m net cash.

How Healthy 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 RM25.5m due within 12 months and liabilities of RM4.72m due beyond that. Offsetting these obligations, it had cash of RM18.5m as well as receivables valued at RM28.1m due within 12 months. So it can boast RM16.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Nexgram Holdings Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nexgram Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Nexgram Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 26%, to RM41m. To be frank that doesn't bode well.

So How Risky Is Nexgram Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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 RM34.8m of cash and made a loss of RM24.4m. With only RM7.93m on the balance sheet, it would appear that its going to need to raise capital again 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Nexgram Holdings Berhad (2 are a bit concerning) you should be aware of.

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. 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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