Is Focus Dynamics Group Berhad (KLSE:FOCUS) Weighed On By Its Debt Load?

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 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. As with many other companies Focus Dynamics Group Berhad (KLSE:FOCUS) makes use of debt. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Focus Dynamics Group Berhad

What Is Focus Dynamics Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Focus Dynamics Group Berhad had debt of RM11.2m, up from RM4.84m in one year. But on the other hand it also has RM22.2m in cash, leading to a RM11.0m net cash position.

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

According to the last reported balance sheet, Focus Dynamics Group Berhad had liabilities of RM66.1m due within 12 months, and liabilities of RM19.8m due beyond 12 months. Offsetting these obligations, it had cash of RM22.2m as well as receivables valued at RM21.0m due within 12 months. So its liabilities total RM42.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM63.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Focus Dynamics Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Focus Dynamics Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 249%, to RM84m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Focus Dynamics Group Berhad?

Although Focus Dynamics Group Berhad had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of RM15m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Focus Dynamics Group Berhad is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat 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. Be aware that Focus Dynamics Group Berhad is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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.