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. As with many other companies Dada Nexus Limited (NASDAQ:DADA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dada Nexus

What Is Dada Nexus's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dada Nexus had CN¥100.0m of debt in June 2022, down from CN¥500.0m, one year before. But on the other hand it also has CN¥4.25b in cash, leading to a CN¥4.15b net cash position.

How Healthy Is Dada Nexus' Balance Sheet?

We can see from the most recent balance sheet that Dada Nexus had liabilities of CN¥2.05b falling due within a year, and liabilities of CN¥56.6m due beyond that. Offsetting this, it had CN¥4.25b in cash and CN¥1.60b in receivables that were due within 12 months. So it actually has CN¥3.75b more liquid assets than total liabilities.

This surplus strongly suggests that Dada Nexus has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Dada Nexus has more cash than debt is arguably a good indication that it can manage its debt safely. 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.

In the last year Dada Nexus wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥8.0b. 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 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¥2.7b of cash and made a loss of CN¥2.3b. But at least it has CN¥4.15b 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. 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. 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.

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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.