Is Dayang Enterprise Holdings Bhd (KLSE:DAYANG) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Dayang Enterprise Holdings Bhd (KLSE:DAYANG) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dayang Enterprise Holdings Bhd

What Is Dayang Enterprise Holdings Bhd's Net Debt?

The image below, which you can click on for greater detail, shows that Dayang Enterprise Holdings Bhd had debt of RM252.5m at the end of March 2024, a reduction from RM419.0m over a year. However, it does have RM547.5m in cash offsetting this, leading to net cash of RM295.0m.

A Look At Dayang Enterprise Holdings Bhd's Liabilities

Zooming in on the latest balance sheet data, we can see that Dayang Enterprise Holdings Bhd had liabilities of RM438.2m due within 12 months and liabilities of RM167.5m due beyond that. Offsetting these obligations, it had cash of RM547.5m as well as receivables valued at RM453.7m due within 12 months. So it can boast RM395.6m more liquid assets than total liabilities.

This surplus suggests that Dayang Enterprise Holdings Bhd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dayang Enterprise Holdings Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Dayang Enterprise Holdings Bhd grew its EBIT by 127% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dayang Enterprise Holdings Bhd can strengthen its balance sheet over time. 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. During the last three years, Dayang Enterprise Holdings Bhd generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dayang Enterprise Holdings Bhd has net cash of RM295.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM266m, being 97% of its EBIT. So we don't think Dayang Enterprise Holdings Bhd's use of debt is risky. 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. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com