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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Destini Berhad (KLSE:DESTINI) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Destini Berhad

What Is Destini Berhad's Net Debt?

As you can see below, Destini Berhad had RM15.9m of debt at March 2023, down from RM98.3m a year prior. However, because it has a cash reserve of RM2.19m, its net debt is less, at about RM13.7m.

A Look At Destini Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Destini Berhad had liabilities of RM131.6m due within 12 months and liabilities of RM17.7m due beyond that. On the other hand, it had cash of RM2.19m and RM102.4m worth of receivables due within a year. So it has liabilities totalling RM44.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Destini Berhad has a market capitalization of RM141.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Destini Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Destini Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 58%, to RM179m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Destini Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM40m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM38m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Destini Berhad is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

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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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.