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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Nexus Infrastructure plc (LON:NEXS) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Nexus Infrastructure's Debt?
You can click the graphic below for the historical numbers, but it shows that Nexus Infrastructure had UK£4.97m of debt in March 2019, down from UK£7.76m, one year before. But it also has UK£17.8m in cash to offset that, meaning it has UK£12.9m net cash.
A Look At Nexus Infrastructure's Liabilities
Zooming in on the latest balance sheet data, we can see that Nexus Infrastructure had liabilities of UK£55.3m due within 12 months and liabilities of UK£6.94m due beyond that. Offsetting these obligations, it had cash of UK£17.8m as well as receivables valued at UK£46.5m due within 12 months. So it actually has UK£2.15m more liquid assets than total liabilities.
This short term liquidity is a sign that Nexus Infrastructure could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nexus Infrastructure has more cash than debt is arguably a good indication that it can manage its debt safely.
Fortunately, Nexus Infrastructure grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. 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 Nexus Infrastructure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nexus Infrastructure may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Nexus Infrastructure recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Nexus Infrastructure has net cash of UK£12.9m, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.6% over the last year. So we are not troubled with Nexus Infrastructure's debt use. We'd be motivated to research the stock further if we found out that Nexus Infrastructure insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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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