Is Optiemus Infracom (NSE:OPTIEMUS) using too much debt?

Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Optiemus Infracom Limited (NSE: OPTIEMUS) has debt on its balance sheet. But should shareholders worry about its use of debt?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, 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 at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

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What is Optiemus Infracom’s debt?

As you can see below, at the end of September 2022, Optiemus Infracom had a debt of ₹863.5 million, up from ₹348.5 million a year ago. Click on the image for more details. However, he also had ₹371.7 million in cash, and hence his net debt is ₹491.8 million.

How healthy is Optiemus Infracom’s balance sheet?

The latest balance sheet data shows that Optiemus Infracom had liabilities of ₹4.18 billion due within a year, and liabilities of ₹520.2 million falling due thereafter. On the other hand, it had a cash position of ₹371.7 million and ₹3.09 billion in receivables due within a year. It therefore has liabilities totaling ₹1.24 billion more than its cash and short-term receivables, combined.

Of course, Optiemus Infracom has a market cap of ₹18.4 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Optiemus Infracom that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Over 12 months, Optiemus Infracom reported revenue of ₹8.3 billion, a gain of 206%, despite reporting no earnings before interest and tax. That’s practically the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Optiemus Infracom’s revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Indeed, it lost ₹207 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost ₹581 million in negative free cash flow in the last twelve months. So, to be frank, we think it’s risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. Be aware that Optiemus Infracom displays 2 warning signs in our investment analysis you should know…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.