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

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.' 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. We note that Nexgram Holdings Berhad (KLSE:NEXGRAM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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 RM12.9m of debt in April 2025, down from RM18.4m, one year before. However, it also had RM3.17m in cash, and so its net debt is RM9.78m.

How Strong Is Nexgram Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Nexgram Holdings Berhad had liabilities of RM30.4m falling due within a year, and liabilities of RM3.78m due beyond that. Offsetting these obligations, it had cash of RM3.17m as well as receivables valued at RM33.3m due within 12 months. So it can boast RM2.29m 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.

Check out our latest analysis for Nexgram Holdings Berhad

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Nexgram Holdings Berhad has a low net debt to EBITDA ratio of only 0.29. And its EBIT easily covers its interest expense, being 19.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Although Nexgram Holdings Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM32m in EBIT over the last twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. In the last year, Nexgram Holdings Berhad created free cash flow amounting to 17% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Happily, Nexgram Holdings Berhad's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Nexgram Holdings Berhad can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nexgram Holdings Berhad you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.