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Is Dada Nexus (NASDAQ:DADA) Using Debt Sensibly?

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.' 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, Dada Nexus Limited (NASDAQ:DADA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Dada Nexus

What Is Dada Nexus's Net Debt?

As you can see below, Dada Nexus had CN¥100.0m of debt at March 2022, down from CN¥500.0m a year prior. However, it does have CN¥4.49b in cash offsetting this, leading to net cash of CN¥4.39b.


How Strong Is Dada Nexus' Balance Sheet?

We can see from the most recent balance sheet that Dada Nexus had liabilities of CN¥1.34b falling due within a year, and liabilities of CN¥64.6m due beyond that. Offsetting these obligations, it had cash of CN¥4.49b as well as receivables valued at CN¥1.29b due within 12 months. So it can boast CN¥4.37b more liquid assets than total liabilities.

This excess liquidity suggests that Dada Nexus is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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 it is future earnings, more than anything, that will determine Dada Nexus's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Dada Nexus wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CN¥7.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Dada Nexus?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥2.7b and booked a CN¥2.4b accounting loss. However, it has net cash of CN¥4.39b, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For instance, we've identified 2 warning signs for Dada Nexus that 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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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.