Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Nextracker Inc. (NASDAQ:NXT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Nextracker's Net Debt?

As you can see below, Nextracker had US$146.9m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$471.9m in cash to offset that, meaning it has US$325.0m net cash.

A Look At Nextracker's Liabilities

The latest balance sheet data shows that Nextracker had liabilities of US$803.0m due within a year, and liabilities of US$687.3m falling due after that. Offsetting these obligations, it had cash of US$471.9m as well as receivables valued at US$931.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$86.6m.

This state of affairs indicates that Nextracker's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$5.79b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

Better yet, Nextracker grew its EBIT by 216% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Nextracker produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. 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$325.0m. And we liked the look of last year's 216% year-on-year EBIT growth. So is Nextracker's debt a risk? It doesn't seem so to us. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.