Dynaciate Group Berhad (KLSE:DYNACIA) Is Making Moderate Use Of Debt

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.' 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. Importantly, Dynaciate Group Berhad (KLSE:DYNACIA) does carry debt. But should shareholders be worried about its use of debt?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dynaciate Group Berhad

How Much Debt Does Dynaciate Group Berhad Carry?

The image below, which you can click on for greater detail, shows that at November 2020 Dynaciate Group Berhad had debt of RM24.0m, up from RM15.6m in one year. However, it does have RM2.23m in cash offsetting this, leading to net debt of about RM21.8m.

A Look At Dynaciate Group Berhad's Liabilities

According to the last reported balance sheet, Dynaciate Group Berhad had liabilities of RM39.7m due within 12 months, and liabilities of RM28.2m due beyond 12 months. On the other hand, it had cash of RM2.23m and RM30.5m worth of receivables due within a year. So its liabilities total RM35.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dynaciate Group Berhad has a market capitalization of RM70.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dynaciate Group 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.

Over 12 months, Dynaciate Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM59m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

Not only did Dynaciate Group Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM17m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM13m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Dynaciate Group Berhad you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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