NetX Holdings Berhad (KLSE:NETX) Has Debt But No Earnings; Should You Worry?

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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 RM23.5m of debt in November 2024, down from RM25.6m, one year before. But it also has RM55.1m in cash to offset that, meaning it has RM31.6m net cash.

A Look At NetX Holdings Berhad's Liabilities

We can see from the most recent balance sheet that NetX Holdings Berhad had liabilities of RM28.2m falling due within a year, and liabilities of RM17.5m due beyond that. Offsetting these obligations, it had cash of RM55.1m as well as receivables valued at RM22.1m due within 12 months. So it actually has RM31.6m more liquid assets than total liabilities.

This surplus liquidity suggests that NetX Holdings Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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! 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 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 RM15m, which is a fall of 10%. 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 RM5.4m and booked a RM28m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of RM31.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for NetX Holdings Berhad (of which 2 are concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.