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

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. As with many other companies NetX Holdings Berhad (KLSE:NETX) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

As you can see below, NetX Holdings Berhad had RM25.6m of debt at November 2023, down from RM32.1m a year prior. But it also has RM65.0m in cash to offset that, meaning it has RM39.4m net cash.

A Look At NetX Holdings Berhad's Liabilities

According to the last reported balance sheet, NetX Holdings Berhad had liabilities of RM19.6m due within 12 months, and liabilities of RM21.1m due beyond 12 months. Offsetting this, it had RM65.0m in cash and RM23.4m in receivables that were due within 12 months. So it can boast RM47.6m 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). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that NetX Holdings Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 RM17m, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is NetX Holdings Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NetX Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM362k of cash and made a loss of RM14m. While this does make the company a bit risky, it's important to remember it has net cash of RM39.4m. That means it could keep spending at its current rate for more than two years. NetX Holdings Berhad's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for NetX Holdings Berhad you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.