Dufu Technology Berhad (KLSE:DUFU) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Dufu Technology Corp. Berhad (KLSE:DUFU) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Dufu Technology Berhad

What Is Dufu Technology Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dufu Technology Berhad had RM13.1m of debt in September 2020, down from RM18.7m, one year before. But on the other hand it also has RM60.2m in cash, leading to a RM47.1m net cash position.

A Look At Dufu Technology Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Dufu Technology Berhad had liabilities of RM41.8m due within 12 months and liabilities of RM10.8m due beyond that. On the other hand, it had cash of RM60.2m and RM87.2m worth of receivables due within a year. So it can boast RM94.8m more liquid assets than total liabilities.

This surplus suggests that Dufu Technology Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dufu Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 weak cash conversion makes it more difficult to handle indebtedness.

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 is Dufu Technology Berhad's debt a risk? It doesn't seem so to us. 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. 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.

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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