Health Check: How Prudently Does Nxt-ID (NASDAQ:NXTD) Use 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 Nxt-ID, Inc. (NASDAQ:NXTD) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nxt-ID

What Is Nxt-ID's Debt?

The image below, which you can click on for greater detail, shows that Nxt-ID had debt of US$5.25m at the end of March 2021, a reduction from US$11.3m over a year. However, it does have US$8.52m in cash offsetting this, leading to net cash of US$3.26m.

A Look At Nxt-ID's Liabilities

The latest balance sheet data shows that Nxt-ID had liabilities of US$6.13m due within a year, and liabilities of US$4.46m falling due after that. Offsetting this, it had US$8.52m in cash and US$67.7k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.01m.

Of course, Nxt-ID has a market capitalization of US$40.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Nxt-ID boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Nxt-ID'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.

In the last year Nxt-ID had a loss before interest and tax, and actually shrunk its revenue by 39%, to US$10m. To be frank that doesn't bode well.

So How Risky Is Nxt-ID?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Nxt-ID lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$1.9m of cash and made a loss of US$9.9m. With only US$3.26m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Nxt-ID (1 shouldn't be ignored) you should be aware of.

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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