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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Dufu Technology Corp. Berhad (KLSE:DUFU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dufu Technology Berhad

What Is Dufu Technology Berhad's Net Debt?

As you can see below, at the end of March 2023, Dufu Technology Berhad had RM51.5m of debt, up from RM24.4m a year ago. Click the image for more detail. But it also has RM104.2m in cash to offset that, meaning it has RM52.6m net cash.

A Look At Dufu Technology Berhad's Liabilities

According to the last reported balance sheet, Dufu Technology Berhad had liabilities of RM39.0m due within 12 months, and liabilities of RM48.6m due beyond 12 months. Offsetting these obligations, it had cash of RM104.2m as well as receivables valued at RM101.2m due within 12 months. So it can boast RM117.8m 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!

But the bad news is that Dufu Technology Berhad has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dufu Technology Berhad will need earnings to service that debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Dufu Technology Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Dufu Technology Berhad reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dufu Technology Berhad has RM52.6m in net cash and a decent-looking balance sheet. So we are not troubled with Dufu Technology Berhad's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dufu Technology Berhad you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.