Nera Telecommunications (SGX:N01) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nera Telecommunications Ltd (SGX:N01) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nera Telecommunications

How Much Debt Does Nera Telecommunications Carry?

You can click the graphic below for the historical numbers, but it shows that Nera Telecommunications had S$23.0m of debt in June 2022, down from S$28.0m, one year before. On the flip side, it has S$19.9m in cash leading to net debt of about S$3.08m.

How Strong Is Nera Telecommunications' Balance Sheet?

The latest balance sheet data shows that Nera Telecommunications had liabilities of S$97.5m due within a year, and liabilities of S$643.0k falling due after that. Offsetting this, it had S$19.9m in cash and S$105.9m in receivables that were due within 12 months. So it actually has S$27.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Nera Telecommunications' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nera Telecommunications 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.

In the last year Nera Telecommunications wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to S$121m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Nera Telecommunications had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$9.5m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Nera Telecommunications (of which 1 is a bit unpleasant!) you should know about.

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.