Is Destini Berhad (KLSE:DESTINI) Using Too Much Debt?

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.' 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, Destini Berhad (KLSE:DESTINI) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Destini Berhad

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 RM105.7m at the end of December 2021, a reduction from RM115.0m over a year. On the flip side, it has RM31.8m in cash leading to net debt of about RM73.9m.

How Healthy Is Destini Berhad's Balance Sheet?

We can see from the most recent balance sheet that Destini Berhad had liabilities of RM271.9m falling due within a year, and liabilities of RM15.6m due beyond that. Offsetting these obligations, it had cash of RM31.8m as well as receivables valued at RM205.2m due within 12 months. So its liabilities total RM50.4m more than the combination of its cash and short-term receivables.

Given Destini Berhad has a market capitalization of RM341.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 RM174m, which is a fall of 8.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Destini Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM9.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM13m of cash over the last year. So to be blunt we think it is risky. 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. For example Destini Berhad has 3 warning signs (and 1 which is significant) we think you should know about.

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.

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

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.