Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nextracker Inc. (NASDAQ:NXT) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Nextracker's Net Debt?

As you can see below, Nextracker had US$146.1m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$561.9m in cash to offset that, meaning it has US$415.8m net cash.

A Look At Nextracker's Liabilities

We can see from the most recent balance sheet that Nextracker had liabilities of US$806.3m falling due within a year, and liabilities of US$680.1m due beyond that. Offsetting these obligations, it had cash of US$561.9m as well as receivables valued at US$884.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$39.7m.

Having regard to Nextracker's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$5.42b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Nextracker boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Nextracker grew its EBIT by 168% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Nextracker recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Nextracker's liabilities, but we can be reassured by the fact it has has net cash of US$415.8m. And it impressed us with its EBIT growth of 168% over the last year. So we don't think Nextracker's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Nextracker that you should be aware of before investing here.

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.