Dayang Enterprise Holdings Bhd (KLSE:DAYANG) Could Easily Take On More 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dayang Enterprise Holdings Bhd (KLSE:DAYANG) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dayang Enterprise Holdings Bhd

What Is Dayang Enterprise Holdings Bhd's Debt?

You can click the graphic below for the historical numbers, but it shows that Dayang Enterprise Holdings Bhd had RM419.2m of debt in March 2023, down from RM494.8m, one year before. But it also has RM423.0m in cash to offset that, meaning it has RM3.76m net cash.

How Healthy Is Dayang Enterprise Holdings Bhd's Balance Sheet?

The latest balance sheet data shows that Dayang Enterprise Holdings Bhd had liabilities of RM334.5m due within a year, and liabilities of RM331.6m falling due after that. Offsetting this, it had RM423.0m in cash and RM271.3m in receivables that were due within 12 months. So it can boast RM28.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Dayang Enterprise Holdings Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Dayang Enterprise Holdings Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Dayang Enterprise Holdings Bhd grew its EBIT by 1,946% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dayang Enterprise Holdings Bhd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dayang Enterprise Holdings Bhd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Dayang Enterprise Holdings Bhd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dayang Enterprise Holdings Bhd has RM3.76m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM165m, being 155% of its EBIT. So we don't think Dayang Enterprise Holdings Bhd's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dayang Enterprise Holdings Bhd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.