Stock Analysis

Health Check: How Prudently Does NetX Holdings Berhad (KLSE:NETX) Use Debt?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, NetX Holdings Berhad (KLSE:NETX) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for NetX Holdings Berhad

What Is NetX Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that NetX Holdings Berhad had debt of RM32.1m at the end of November 2022, a reduction from RM34.0m over a year. But it also has RM70.0m in cash to offset that, meaning it has RM37.8m net cash.

KLSE:NETX Debt to Equity History March 15th 2023

How Strong Is NetX Holdings Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NetX Holdings Berhad had liabilities of RM11.4m due within 12 months and liabilities of RM26.8m due beyond that. Offsetting this, it had RM70.0m in cash and RM21.7m in receivables that were due within 12 months. So it actually has RM53.4m more liquid assets than total liabilities.

This surplus strongly suggests that NetX Holdings Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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 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 NetX Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to RM14m. We usually like to see faster growth from unprofitable companies, but each to their own.

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. Indeed, in that time it burnt through RM6.8m of cash and made a loss of RM16m. While this does make the company a bit risky, it's important to remember it has net cash of RM37.8m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 4 warning signs with NetX Holdings Berhad (at least 2 which are significant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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