Is NetX Holdings Berhad (KLSE:NETX) A Risky Investment?

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.' 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 note that NetX Holdings Berhad (KLSE:NETX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 May 2022 NetX Holdings Berhad had RM32.9m of debt, an increase on RM1.81m, over one year. But on the other hand it also has RM74.0m in cash, leading to a RM41.1m net cash position.

How Healthy 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 RM8.37m due within 12 months and liabilities of RM29.4m due beyond that. Offsetting these obligations, it had cash of RM74.0m as well as receivables valued at RM22.3m due within 12 months. So it can boast RM58.5m 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. 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 made a loss at the EBIT level, and saw its revenue drop to RM12m, which is a fall of 8.2%. We would much prefer see 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 RM10m and booked a RM14m accounting loss. But the saving grace is the RM41.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 which are a bit unpleasant) , and understanding them should be part of your investment process.

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. 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.