Does Damansara Holdings Berhad (KLSE:DBHD) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Damansara Holdings Berhad (KLSE:DBHD) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Damansara Holdings Berhad

What Is Damansara Holdings Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Damansara Holdings Berhad had RM10.8m in debt in December 2020; about the same as the year before. But on the other hand it also has RM26.5m in cash, leading to a RM15.6m net cash position.

A Look At Damansara Holdings Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Damansara Holdings Berhad had liabilities of RM137.3m due within 12 months and liabilities of RM30.8m due beyond that. Offsetting these obligations, it had cash of RM26.5m as well as receivables valued at RM80.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM60.8m.

Damansara Holdings Berhad has a market capitalization of RM117.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Damansara Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Damansara Holdings 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.

In the last year Damansara Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 35%, to RM190m. To be frank that doesn't bode well.

So How Risky Is Damansara Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Damansara Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM850k and booked a RM12m accounting loss. With only RM15.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 1 warning sign for Damansara Holdings Berhad that you should be aware of.

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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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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