Does Dufu Technology Berhad (KLSE:DUFU) Have A Healthy Balance Sheet?

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.' 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, Dufu Technology Corp. Berhad (KLSE:DUFU) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dufu Technology Berhad

How Much Debt Does Dufu Technology Berhad Carry?

As you can see below, Dufu Technology Berhad had RM13.1m of debt at September 2020, down from RM18.7m a year prior. But it also has RM60.2m in cash to offset that, meaning it has RM47.1m net cash.

A Look At Dufu Technology Berhad's Liabilities

According to the last reported balance sheet, Dufu Technology Berhad had liabilities of RM41.8m due within 12 months, and liabilities of RM10.8m due beyond 12 months. On the other hand, it had cash of RM60.2m and RM87.2m worth of receivables due within a year. So it actually has RM94.8m more liquid assets than total liabilities.

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

And we also note warmly that Dufu Technology Berhad grew its EBIT by 19% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dufu Technology 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Dufu Technology 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. In the last three years, Dufu Technology Berhad's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Dufu Technology Berhad has RM47.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 19% over the last year. So we don't think Dufu Technology Berhad's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Dufu Technology Berhad's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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