Nexgram Holdings Berhad (KLSE:NEXGRAM) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 RM17.9m at the end of July 2022, a reduction from RM21.8m over a year. But it also has RM18.8m in cash to offset that, meaning it has RM934.4k net cash.

A Look At Nexgram Holdings Berhad's Liabilities

We can see from the most recent balance sheet that Nexgram Holdings Berhad had liabilities of RM40.2m falling due within a year, and liabilities of RM13.8m due beyond that. Offsetting these obligations, it had cash of RM18.8m as well as receivables valued at RM7.49m due within 12 months. So it has liabilities totalling RM27.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM44.1m, so it does suggest shareholders should keep an eye on Nexgram Holdings Berhad's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Nexgram Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Nexgram Holdings Berhad made a loss at the EBIT level, and saw its revenue drop to RM32m, which is a fall of 57%. That makes us nervous, to say the least.

So How Risky Is Nexgram Holdings Berhad?

While Nexgram Holdings Berhad lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM6.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Nexgram Holdings Berhad has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.