Nexgram Holdings Berhad (KLSE:NEXGRAM) Is Making Moderate Use Of 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

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 as of April 2021 Nexgram Holdings Berhad had RM79.6m of debt, an increase on RM11.8m, over one year. However, it does have RM26.7m in cash offsetting this, leading to net debt of about RM52.8m.

How Healthy Is Nexgram Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Nexgram Holdings Berhad had liabilities of RM84.8m falling due within a year, and liabilities of RM15.0m due beyond that. Offsetting this, it had RM26.7m in cash and RM47.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM25.4m.

Nexgram Holdings Berhad has a market capitalization of RM100.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Nexgram Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. 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 reported revenue of RM90m, which is a gain of 118%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Nexgram Holdings Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM61m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM13m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nexgram Holdings Berhad is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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. 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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