Dayang Enterprise Holdings Bhd (KLSE:DAYANG) Has A Rock Solid Balance Sheet

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.' 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. We note that Dayang Enterprise Holdings Bhd (KLSE:DAYANG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Dayang Enterprise Holdings Bhd

What Is Dayang Enterprise Holdings Bhd's Debt?

The image below, which you can click on for greater detail, shows that Dayang Enterprise Holdings Bhd had debt of RM370.9m at the end of June 2023, a reduction from RM535.3m over a year. However, it does have RM400.3m in cash offsetting this, leading to net cash of RM29.4m.

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

We can see from the most recent balance sheet that Dayang Enterprise Holdings Bhd had liabilities of RM353.1m falling due within a year, and liabilities of RM310.1m due beyond that. Offsetting these obligations, it had cash of RM400.3m as well as receivables valued at RM407.5m due within 12 months. So it actually has RM144.6m 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 203% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Dayang Enterprise Holdings Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Dayang Enterprise Holdings Bhd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dayang Enterprise Holdings Bhd has RM29.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM222m, being 123% of its EBIT. So is Dayang Enterprise Holdings Bhd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Dayang Enterprise Holdings Bhd, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.