Does NetX Holdings Berhad (KLSE:NETX) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, NetX Holdings Berhad (KLSE:NETX) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NetX Holdings Berhad

How Much Debt Does NetX Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2021 NetX Holdings Berhad had RM34.0m of debt, an increase on RM1.99m, over one year. However, its balance sheet shows it holds RM90.6m in cash, so it actually has RM56.6m net cash.

How Healthy Is NetX Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that NetX Holdings Berhad had liabilities of RM9.34m due within a year, and liabilities of RM32.0m falling due after that. On the other hand, it had cash of RM90.6m and RM22.0m worth of receivables due within a year. So it actually has RM71.4m more liquid assets than total liabilities.

This luscious liquidity implies that NetX Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, NetX Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NetX Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, NetX Holdings Berhad reported revenue of RM81m, which is a gain of 444%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is NetX Holdings Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that NetX Holdings Berhad had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RM13m and booked a RM21m accounting loss. But the saving grace is the RM56.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, NetX Holdings Berhad's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For instance, we've identified 3 warning signs for NetX Holdings Berhad (1 is concerning) you should be aware of.

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. 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.