Is DXN (ASX:DXN) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 DXN Limited (ASX:DXN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does DXN Carry?

You can click the graphic below for the historical numbers, but it shows that DXN had AU$3.25m of debt in December 2024, down from AU$4.57m, one year before. But it also has AU$5.10m in cash to offset that, meaning it has AU$1.85m net cash.

A Look At DXN's Liabilities

Zooming in on the latest balance sheet data, we can see that DXN had liabilities of AU$7.19m due within 12 months and liabilities of AU$4.06m due beyond that. Offsetting this, it had AU$5.10m in cash and AU$1.08m in receivables that were due within 12 months. So it has liabilities totalling AU$5.07m more than its cash and near-term receivables, combined.

DXN has a market capitalization of AU$15.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, DXN boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

View our latest analysis for DXN

Over 12 months, DXN reported revenue of AU$14m, which is a gain of 74%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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. And over the same period it saw negative free cash outflow of AU$743k and booked a AU$2.9m accounting loss. But the saving grace is the AU$1.85m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. We've identified 4 warning signs with DXN (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.