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

Simply Wall St

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dada Nexus

What Is Dada Nexus's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Dada Nexus had CN¥350.0m of debt, an increase on none, over one year. But it also has CN¥4.31b in cash to offset that, meaning it has CN¥3.96b net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Dada Nexus's Liabilities

According to the last reported balance sheet, Dada Nexus had liabilities of CN¥1.45b due within 12 months, and liabilities of CN¥109.8m due beyond 12 months. Offsetting this, it had CN¥4.31b in cash and CN¥616.5m in receivables that were due within 12 months. So it can boast CN¥3.37b 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Dada Nexus wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to CN¥4.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Dada Nexus?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dada Nexus had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.3b of cash and made a loss of CN¥2.6b. But at least it has CN¥3.96b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Dada Nexus may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great 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 instance, we've identified 2 warning signs for Dada Nexus that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

This article by Simply Wall St is general in nature. 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.

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