Is Nexgram Holdings Berhad (KLSE:NEXGRAM) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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 RM22.8m at the end of January 2022, a reduction from RM70.3m over a year. However, its balance sheet shows it holds RM27.8m in cash, so it actually has RM4.95m net cash.

A Look At Nexgram Holdings Berhad's Liabilities

The latest balance sheet data shows that Nexgram Holdings Berhad had liabilities of RM32.4m due within a year, and liabilities of RM10.3m falling due after that. Offsetting these obligations, it had cash of RM27.8m as well as receivables valued at RM32.4m due within 12 months. So it can boast RM17.5m more liquid assets than total liabilities.

This surplus strongly suggests that Nexgram Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Nexgram Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Nexgram Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 32%, to RM45m. 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 RM15m of cash and made a loss of RM5.8m. Given it only has net cash of RM4.95m, 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. Case in point: We've spotted 4 warning signs for Nexgram Holdings Berhad you should be aware of, and 2 of them are a bit concerning.

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.