Here's Why Dynaciate Group Berhad (KLSE:DYNACIA) Can Afford Some Debt

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. We note that Dynaciate Group Berhad (KLSE:DYNACIA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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.

Check out our latest analysis for Dynaciate Group Berhad

What Is Dynaciate Group Berhad's Debt?

As you can see below, at the end of February 2021, Dynaciate Group Berhad had RM25.4m of debt, up from RM15.6m a year ago. Click the image for more detail. However, it also had RM797.0k in cash, and so its net debt is RM24.6m.

How Strong Is Dynaciate Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dynaciate Group Berhad had liabilities of RM43.0m due within 12 months and liabilities of RM26.6m due beyond that. Offsetting these obligations, it had cash of RM797.0k as well as receivables valued at RM28.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM40.1m.

While this might seem like a lot, it is not so bad since Dynaciate Group Berhad has a market capitalization of RM67.1m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dynaciate Group 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.

Over 12 months, Dynaciate Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM45m, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While Dynaciate Group Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM18m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM19m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Dynaciate Group Berhad that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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