Does Dagang NeXchange Berhad (KLSE:DNEX) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Dagang NeXchange Berhad (KLSE:DNEX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Dagang NeXchange Berhad

How Much Debt Does Dagang NeXchange Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Dagang NeXchange Berhad had RM295.2m of debt in December 2022, down from RM319.4m, one year before. However, it does have RM634.5m in cash offsetting this, leading to net cash of RM339.3m.

How Strong Is Dagang NeXchange Berhad's Balance Sheet?

We can see from the most recent balance sheet that Dagang NeXchange Berhad had liabilities of RM532.0m falling due within a year, and liabilities of RM1.71b due beyond that. Offsetting these obligations, it had cash of RM634.5m as well as receivables valued at RM303.2m due within 12 months. So its liabilities total RM1.30b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM1.45b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Dagang NeXchange Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Dagang NeXchange Berhad grew its EBIT by 103% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dagang NeXchange Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Dagang NeXchange Berhad 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 last two years, Dagang NeXchange Berhad reported free cash flow worth 15% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although Dagang NeXchange Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM339.3m. And it impressed us with its EBIT growth of 103% over the last year. So we are not troubled with Dagang NeXchange Berhad's debt use. 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 instance, we've identified 1 warning sign for Dagang NeXchange Berhad that you should be aware of.

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.