NetX Holdings Berhad (KLSE:NETX) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, NetX Holdings Berhad (KLSE:NETX) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that NetX Holdings Berhad had RM31.0m of debt in February 2023, down from RM33.5m, one year before. But on the other hand it also has RM61.4m in cash, leading to a RM30.4m net cash position.

How Strong 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 RM10.0m due within 12 months and liabilities of RM26.5m due beyond that. Offsetting these obligations, it had cash of RM61.4m as well as receivables valued at RM23.9m due within 12 months. So it actually has RM48.8m more liquid assets than total liabilities.

This luscious liquidity implies that NetX Holdings Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, NetX Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! 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 RM14m, which is a gain of 62%, 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?

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 RM13m of cash and made a loss of RM16m. But the saving grace is the RM30.4m on the balance sheet. 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. 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. Be aware that NetX Holdings Berhad is showing 5 warning signs in our investment analysis , and 2 of those are significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.