Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Next Fifteen Communications Group plc (LON:NFC) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Next Fifteen Communications Group Carry?
As you can see below, at the end of January 2022, Next Fifteen Communications Group had UK£22.5m of debt, up from UK£12.8m a year ago. Click the image for more detail. But on the other hand it also has UK£58.2m in cash, leading to a UK£35.7m net cash position.
A Look At Next Fifteen Communications Group's Liabilities
The latest balance sheet data shows that Next Fifteen Communications Group had liabilities of UK£180.3m due within a year, and liabilities of UK£203.0m falling due after that. Offsetting this, it had UK£58.2m in cash and UK£115.0m in receivables that were due within 12 months. So its liabilities total UK£210.1m more than the combination of its cash and short-term receivables.
Of course, Next Fifteen Communications Group has a market capitalization of UK£1.27b, 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, Next Fifteen Communications Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Next Fifteen Communications Group grew its EBIT by 177% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Next Fifteen Communications Group'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. Next Fifteen Communications Group 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. Happily for any shareholders, Next Fifteen Communications Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While Next Fifteen Communications Group does have more liabilities than liquid assets, it also has net cash of UK£35.7m. And it impressed us with free cash flow of UK£73m, being 214% of its EBIT. So is Next Fifteen Communications Group's debt a risk? It doesn't seem so to us. 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. Be aware that Next Fifteen Communications Group is showing 1 warning sign in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.