These 4 Measures Indicate That Dayang Enterprise Holdings Bhd (KLSE:DAYANG) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Dayang Enterprise Holdings Bhd (KLSE:DAYANG) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Dayang Enterprise Holdings Bhd Carry?

You can click the graphic below for the historical numbers, but it shows that Dayang Enterprise Holdings Bhd had RM117.2m of debt in December 2024, down from RM238.4m, one year before. But on the other hand it also has RM701.8m in cash, leading to a RM584.6m net cash position.

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 RM486.5m falling due within a year, and liabilities of RM85.4m due beyond that. Offsetting this, it had RM701.8m in cash and RM519.1m in receivables that were due within 12 months. So it actually has RM649.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Dayang Enterprise Holdings Bhd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

Check out our latest analysis for Dayang Enterprise Holdings Bhd

In addition to that, we're happy to report that Dayang Enterprise Holdings Bhd has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 82% 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 RM584.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM377m, being 82% of its EBIT. 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. We've identified 2 warning signs with Dayang Enterprise Holdings Bhd , and understanding them should be part of your investment process.

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.