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. Importantly, Nexus Infrastructure plc (LON:NEXS) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nexus Infrastructure

How Much Debt Does Nexus Infrastructure Carry?

The image below, which you can click on for greater detail, shows that Nexus Infrastructure had debt of UK£10.6m at the end of March 2022, a reduction from UK£11.9m over a year. But on the other hand it also has UK£23.1m in cash, leading to a UK£12.5m net cash position.

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£77.3m due within 12 months and liabilities of UK£10.2m due beyond that. On the other hand, it had cash of UK£23.1m and UK£70.0m worth of receivables due within a year. So it actually has UK£5.69m 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.

It was also good to see that despite losing money on the EBIT line last year, Nexus Infrastructure turned things around in the last 12 months, delivering and EBIT of UK£3.8m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nexus Infrastructure can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last year, Nexus Infrastructure burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.