Health Check: How Prudently Does DXN (ASX:DXN) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that DXN Limited (ASX:DXN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DXN

What Is DXN's Debt?

The image below, which you can click on for greater detail, shows that DXN had debt of AU$3.25m at the end of December 2024, a reduction from AU$4.57m over a year. However, its balance sheet shows it holds AU$5.10m in cash, so it actually has AU$1.85m net cash.

How Healthy Is DXN's Balance Sheet?

We can see from the most recent balance sheet that DXN had liabilities of AU$7.19m falling due within a year, and liabilities of AU$4.06m due beyond that. Offsetting these obligations, it had cash of AU$5.10m as well as receivables valued at AU$1.08m due within 12 months. So its liabilities total AU$5.07m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since DXN has a market capitalization of AU$10.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, DXN also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 DXN'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.

In the last year DXN wasn't profitable at an EBIT level, but managed to grow its revenue by 74%, to AU$14m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is DXN?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months DXN lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$743k of cash and made a loss of AU$2.9m. While this does make the company a bit risky, it's important to remember it has net cash of AU$1.85m. That means it could keep spending at its current rate for more than two years. DXN's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example DXN has 3 warning signs (and 2 which are concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.