Stock Analysis

Destini Berhad (KLSE:DESTINI) Is Carrying A Fair Bit Of Debt

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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 Destini Berhad (KLSE:DESTINI) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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How Much Debt Does Destini Berhad Carry?

The image below, which you can click on for greater detail, shows that Destini Berhad had debt of RM92.3m at the end of June 2022, a reduction from RM104.7m over a year. On the flip side, it has RM4.61m in cash leading to net debt of about RM87.6m.

KLSE:DESTINI Debt to Equity History September 6th 2022

How Strong Is Destini Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Destini Berhad had liabilities of RM284.7m due within 12 months and liabilities of RM13.7m due beyond that. Offsetting this, it had RM4.61m in cash and RM274.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM19.0m.

Of course, Destini Berhad has a market capitalization of RM133.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Destini Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Destini Berhad made a loss at the EBIT level, and saw its revenue drop to RM116m, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Destini Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RM15m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM43m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Destini Berhad has 5 warning signs (and 1 which is potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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Destini Berhad

Destini Berhad, an investment holding company, provides engineering solutions worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth0
Past Performance2
Financial Health2

Read more about these checks in the individual report sections or in our analysis model.

Slightly overvalued with questionable track record.