These 4 Measures Indicate That Nextracker (NASDAQ:NXT) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Nextracker Inc. (NASDAQ:NXT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nextracker

What Is Nextracker's Debt?

As you can see below, Nextracker had US$145.3m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$693.5m in cash, so it actually has US$548.2m net cash.

How Strong Is Nextracker's Balance Sheet?

We can see from the most recent balance sheet that Nextracker had liabilities of US$904.6m falling due within a year, and liabilities of US$654.0m due beyond that. Offsetting these obligations, it had cash of US$693.5m as well as receivables valued at US$946.8m due within 12 months. So it can boast US$81.8m more liquid assets than total liabilities.

Having regard to Nextracker's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$6.80b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Nextracker boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Nextracker grew its EBIT by 101% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nextracker's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Nextracker has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Nextracker recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nextracker has US$548.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 101% over the last year. So is Nextracker's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Nextracker , and understanding them should be part of your investment process.

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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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.