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

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.' 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 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dagang NeXchange Berhad

What Is Dagang NeXchange Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Dagang NeXchange Berhad had debt of RM123.0m, up from RM66.3m in one year. However, because it has a cash reserve of RM66.2m, its net debt is less, at about RM56.8m.

A Look At Dagang NeXchange Berhad's Liabilities

We can see from the most recent balance sheet that Dagang NeXchange Berhad had liabilities of RM167.0m falling due within a year, and liabilities of RM21.5m due beyond that. Offsetting this, it had RM66.2m in cash and RM149.2m in receivables that were due within 12 months. So it can boast RM26.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Dagang NeXchange Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Over 12 months, Dagang NeXchange Berhad made a loss at the EBIT level, and saw its revenue drop to RM240m, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did Dagang NeXchange Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM12m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Dagang NeXchange Berhad (1 is concerning) 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. 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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