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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Nexgram Holdings Berhad (KLSE:NEXGRAM) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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

What Is Nexgram Holdings Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Nexgram Holdings Berhad had RM17.1m of debt in July 2020, down from RM71.6m, one year before. However, its balance sheet shows it holds RM33.1m in cash, so it actually has RM16.0m net cash.

A Look At Nexgram Holdings Berhad's Liabilities

The latest balance sheet data shows that Nexgram Holdings Berhad had liabilities of RM24.9m due within a year, and liabilities of RM10.6m falling due after that. On the other hand, it had cash of RM33.1m and RM12.4m worth of receivables due within a year. So it can boast RM9.88m 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! 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 RM41m, which is a fall of 29%. That makes us nervous, to say the least.

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 the fact is that over the last twelve months Nexgram Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM31m of cash and made a loss of RM62m. Given it only has net cash of RM16.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Nexgram Holdings Berhad (including 2 which is are a bit unpleasant) .

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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