Does DKLS Industries Berhad (KLSE:DKLS) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies DKLS Industries Berhad (KLSE:DKLS) makes use of 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DKLS Industries Berhad

What Is DKLS Industries Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that DKLS Industries Berhad had RM53.5m of debt in September 2020, down from RM68.3m, one year before. But on the other hand it also has RM90.6m in cash, leading to a RM37.1m net cash position.

How Strong Is DKLS Industries Berhad's Balance Sheet?

The latest balance sheet data shows that DKLS Industries Berhad had liabilities of RM80.7m due within a year, and liabilities of RM45.6m falling due after that. Offsetting these obligations, it had cash of RM90.6m as well as receivables valued at RM43.6m due within 12 months. So it actually has RM7.94m more liquid assets than total liabilities.

This short term liquidity is a sign that DKLS Industries Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DKLS Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Sadly, DKLS Industries Berhad's EBIT actually dropped 8.9% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DKLS Industries Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While DKLS Industries Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, DKLS Industries Berhad recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DKLS Industries Berhad has net cash of RM37.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in RM11m. So we don't have any problem with DKLS Industries Berhad's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for DKLS Industries Berhad (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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