We Think Dagang NeXchange Berhad (KLSE:DNEX) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Dagang NeXchange Berhad (KLSE:DNEX) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, at the end of June 2020, Dagang NeXchange Berhad had RM108.8m of debt, up from RM56.4m a year ago. Click the image for more detail. On the flip side, it has RM38.6m in cash leading to net debt of about RM70.2m.

A Look At Dagang NeXchange Berhad's Liabilities

We can see from the most recent balance sheet that Dagang NeXchange Berhad had liabilities of RM196.8m falling due within a year, and liabilities of RM19.4m due beyond that. Offsetting these obligations, it had cash of RM38.6m as well as receivables valued at RM204.4m due within 12 months. So it actually has RM26.8m more liquid assets than total liabilities.

This surplus suggests that Dagang NeXchange Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dagang NeXchange Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Dagang NeXchange Berhad had a loss before interest and tax, and actually shrunk its revenue by 12%, to RM275m. That's not what we would hope to see.

Caveat Emptor

While Dagang NeXchange Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at RM8.9m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Dagang NeXchange Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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