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

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 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?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dayang Enterprise Holdings Bhd

What Is Dayang Enterprise Holdings Bhd's Net Debt?

As you can see below, Dayang Enterprise Holdings Bhd had RM190.2m of debt at June 2024, down from RM370.9m a year prior. However, it does have RM490.1m in cash offsetting this, leading to net cash of RM299.9m.

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

According to the last reported balance sheet, Dayang Enterprise Holdings Bhd had liabilities of RM474.3m due within 12 months, and liabilities of RM139.7m due beyond 12 months. On the other hand, it had cash of RM490.1m and RM663.6m worth of receivables due within a year. So it can boast RM539.7m more liquid assets than total liabilities.

This excess liquidity suggests that Dayang Enterprise Holdings Bhd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 109% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Dayang Enterprise Holdings Bhd recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 RM299.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 109% over the last year. When it comes to Dayang Enterprise Holdings Bhd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 2 warning signs for Dayang Enterprise Holdings Bhd (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.