Here's Why NetX Holdings Berhad (KLSE:NETX) Can Manage Its Debt Despite Losing Money

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that NetX Holdings Berhad (KLSE:NETX) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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?

You can click the graphic below for the historical numbers, but it shows that NetX Holdings Berhad had RM29.6m of debt in May 2023, down from RM32.9m, one year before. However, it does have RM58.2m in cash offsetting this, leading to net cash of RM28.6m.

How Strong Is NetX Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that NetX Holdings Berhad had liabilities of RM12.1m falling due within a year, and liabilities of RM25.0m due beyond that. On the other hand, it had cash of RM58.2m and RM27.5m worth of receivables due within a year. So it actually has RM48.6m more liquid assets than total liabilities.

This surplus suggests that NetX Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, NetX Holdings Berhad reported revenue of RM17m, which is a gain of 106%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is NetX Holdings Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NetX Holdings Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM9.1m of cash and made a loss of RM17m. But the saving grace is the RM28.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with NetX Holdings Berhad (at least 2 which can't be ignored) , 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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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.