Is NetX Holdings Berhad (KLSE:NETX) Using Debt In A Risky Way?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that NetX Holdings Berhad (KLSE:NETX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NetX Holdings Berhad

What Is NetX Holdings Berhad's Debt?

As you can see below, at the end of February 2022, NetX Holdings Berhad had RM33.5m of debt, up from RM1.90m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM79.8m in cash, so it actually has RM46.3m net cash.

A Look At NetX Holdings Berhad's Liabilities

According to the last reported balance sheet, NetX Holdings Berhad had liabilities of RM7.72m due within 12 months, and liabilities of RM30.9m due beyond 12 months. Offsetting this, it had RM79.8m in cash and RM16.7m in receivables that were due within 12 months. So it actually has RM57.8m 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 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 had a loss before interest and tax, and actually shrunk its revenue by 28%, to RM11m. To be frank that doesn't bode well.

So How Risky Is NetX Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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 RM9.6m 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 RM46.3m. 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. Be aware that NetX Holdings Berhad is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.