Dancomech Holdings Berhad (KLSE:DANCO) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Dancomech Holdings Berhad (KLSE:DANCO) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dancomech Holdings Berhad

How Much Debt Does Dancomech Holdings Berhad Carry?

The image below, which you can click on for greater detail, shows that Dancomech Holdings Berhad had debt of RM12.7m at the end of March 2024, a reduction from RM15.4m over a year. However, it does have RM111.1m in cash offsetting this, leading to net cash of RM98.4m.

How Healthy Is Dancomech Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Dancomech Holdings Berhad had liabilities of RM55.2m falling due within a year, and liabilities of RM14.9m due beyond that. Offsetting this, it had RM111.1m in cash and RM53.1m in receivables that were due within 12 months. So it actually has RM94.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Dancomech Holdings Berhad's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Dancomech Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Dancomech Holdings Berhad has increased its EBIT by 3.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dancomech Holdings Berhad 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dancomech Holdings Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Dancomech Holdings Berhad produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dancomech Holdings Berhad has net cash of RM98.4m, as well as more liquid assets than liabilities. So is Dancomech Holdings Berhad's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Dancomech Holdings Berhad , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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