Is Dufu Technology Berhad (KLSE:DUFU) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Dufu Technology Corp. Berhad (KLSE:DUFU) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dufu Technology Berhad

What Is Dufu Technology Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Dufu Technology Berhad had debt of RM11.5m at the end of March 2021, a reduction from RM21.0m over a year. However, it does have RM86.8m in cash offsetting this, leading to net cash of RM75.2m.

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 RM44.0m due within 12 months and liabilities of RM9.48m due beyond that. Offsetting these obligations, it had cash of RM86.8m as well as receivables valued at RM103.0m due within 12 months. So it can boast RM136.3m 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. Simply put, the fact that Dufu Technology Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Dufu Technology Berhad grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Dufu Technology Berhad recorded free cash flow of 22% of its EBIT, which is weaker 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 RM75.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So is Dufu Technology Berhad's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Dufu Technology Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.