Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Nextracker Inc. (NASDAQ:NXT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 Nextracker Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Nextracker had debt of US$144.8m, up from none in one year. But on the other hand it also has US$367.8m in cash, leading to a US$223.1m net cash position.

How Strong Is Nextracker's Balance Sheet?

We can see from the most recent balance sheet that Nextracker had liabilities of US$759.4m falling due within a year, and liabilities of US$584.2m due beyond that. Offsetting these obligations, it had cash of US$367.8m as well as receivables valued at US$716.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$259.0m.

Since publicly traded Nextracker shares are worth a total of US$6.20b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Nextracker also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Nextracker grew its EBIT by 142% over twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, Nextracker recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Nextracker has US$223.1m in net cash. And we liked the look of last year's 142% year-on-year EBIT growth. So we don't think Nextracker's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Nextracker, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.