Focus Dynamics Group Berhad (KLSE:FOCUS) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Focus Dynamics Group Berhad (KLSE:FOCUS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Focus Dynamics Group Berhad

What Is Focus Dynamics Group Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Focus Dynamics Group Berhad had RM11.2m in debt in December 2024; about the same as the year before. However, because it has a cash reserve of RM8.62m, its net debt is less, at about RM2.58m.

How Strong Is Focus Dynamics Group Berhad's Balance Sheet?

The latest balance sheet data shows that Focus Dynamics Group Berhad had liabilities of RM61.9m due within a year, and liabilities of RM54.8m falling due after that. On the other hand, it had cash of RM8.62m and RM26.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM81.3m.

This deficit is considerable relative to its market capitalization of RM127.4m, so it does suggest shareholders should keep an eye on Focus Dynamics Group Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Focus Dynamics Group Berhad has a very low debt to EBITDA ratio of 0.27 so it is strange to see weak interest coverage, with last year's EBIT being only 0.96 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. Notably, Focus Dynamics Group Berhad made a loss at the EBIT level, last year, but improved that to positive EBIT of RM2.8m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Focus Dynamics Group 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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Focus Dynamics Group Berhad actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Based on what we've seen Focus Dynamics Group Berhad is not finding it easy, given its interest cover, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to convert EBIT to free cash flow is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Focus Dynamics Group Berhad's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Focus Dynamics Group Berhad (including 2 which make us uncomfortable) .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.