Stock Analysis

Rock star Growth Puts Dada Nexus (NASDAQ:DADA) In A Position To Use Debt

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dada Nexus

How Much Debt Does Dada Nexus Carry?

As you can see below, at the end of March 2021, Dada Nexus had CN¥500.0m of debt, up from CN¥100.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥5.44b in cash, leading to a CN¥4.94b net cash position.

NasdaqGS:DADA Debt to Equity History July 28th 2021

How Strong Is Dada Nexus' Balance Sheet?

The latest balance sheet data shows that Dada Nexus had liabilities of CN¥2.03b due within a year, and liabilities of CN¥98.9m falling due after that. On the other hand, it had cash of CN¥5.44b and CN¥837.3m worth of receivables due within a year. So it actually has CN¥4.15b more liquid assets than total liabilities.

This surplus suggests that Dada Nexus has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Dada Nexus reported revenue of CN¥6.3b, which is a gain of 72%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Dada Nexus?

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 Dada Nexus had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥1.1b and booked a CN¥2.3b accounting loss. However, it has net cash of CN¥4.94b, so it has a bit of time before it will need more capital. Dada Nexus'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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Dada Nexus has 3 warning signs we think you should be aware of.

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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