Is Dada Nexus (NASDAQ:DADA) A Risky Investment?

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. We can see that Dada Nexus Limited (NASDAQ:DADA) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dada Nexus

How Much Debt Does Dada Nexus Carry?

As you can see below, Dada Nexus had CN¥100.0m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥3.32b in cash, leading to a CN¥3.22b net cash position.

How Strong Is Dada Nexus' Balance Sheet?

The latest balance sheet data shows that Dada Nexus had liabilities of CN¥1.65b due within a year, and liabilities of CN¥29.9m falling due after that. Offsetting this, it had CN¥3.32b in cash and CN¥1.49b in receivables that were due within 12 months. So it actually has CN¥3.14b more liquid assets than total liabilities.

This surplus suggests that Dada Nexus 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. Succinctly put, Dada Nexus 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 ultimately the future profitability of the business will decide if Dada Nexus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Dada Nexus reported revenue of CN¥9.9b, which is a gain of 37%, 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 Dada Nexus?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Dada Nexus lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥949m and booked a CN¥1.8b accounting loss. However, it has net cash of CN¥3.22b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Dada Nexus may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Dada Nexus , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.