David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that Dayang Enterprise Holdings Bhd (KLSE:DAYANG) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Dayang Enterprise Holdings Bhd
How much debt does Dayang Enterprise Holdings Bhd have?
The image below, which you can click on for more details, shows that Dayang Enterprise Holdings Bhd had debt of RM587.6 million at the end of September 2021, a reduction from RM789.9 million on a year. However, he has RM468.9 million in cash to offset this, resulting in a net debt of around RM118.7 million.
How healthy is Dayang Enterprise Holdings Bhd’s balance sheet?
According to the latest published balance sheet, Dayang Enterprise Holdings Bhd had liabilities of RM347.4 million due within 12 months and liabilities of RM565.6 million due beyond 12 months. In return, he had RM468.9 million in cash and RM399.5 million in receivables due within 12 months. Thus, its liabilities total RM44.5 million more than the combination of its cash and short-term receivables.
Given that Dayang Enterprise Holdings Bhd has a market capitalization of RM1.15 billion, it is hard to believe that these liabilities pose a big threat. That said, it is clear that we must continue to monitor its record, lest it deteriorate.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Dayang Enterprise Holdings Bhd has a very low debt to EBITDA ratio of 0.87, so it is strange to see low interest coverage as last year’s EBIT was only 1.1x interest expense. interests. So either way, it’s clear that debt levels are not negligible. It is important to note that Dayang Enterprise Holdings Bhd’s EBIT has fallen by 89% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Dayang Enterprise Holdings Bhd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, Dayang Enterprise Holdings Bhd has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
We weren’t impressed with Dayang Enterprise Holdings Bhd’s interest coverage, and its EBIT growth rate made us cautious. But its conversion from EBIT to free cash flow has been significantly rewarding. Looking at all this data, we feel a bit cautious about Dayang Enterprise Holdings Bhd’s debt levels. While we understand that debt can improve return on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for Dayang Enterprise Holdings Bhd you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.