We Think Dialog Group Berhad (KLSE:DIALOG) Can Manage Its Debt With Ease

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.' 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. As with many other companies Dialog Group Berhad (KLSE:DIALOG) makes use of debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dialog Group Berhad

What Is Dialog Group Berhad's Net Debt?

As you can see below, Dialog Group Berhad had RM1.55b of debt at September 2024, down from RM1.99b a year prior. However, it also had RM1.51b in cash, and so its net debt is RM39.0m.

A Look At Dialog Group Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that Dialog Group Berhad had liabilities of RM1.10b due within 12 months and liabilities of RM1.34b due beyond that. Offsetting this, it had RM1.51b in cash and RM759.5m in receivables that were due within 12 months. So its liabilities total RM176.9m more than the combination of its cash and short-term receivables.

Having regard to Dialog Group Berhad's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM11.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Dialog Group Berhad has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Dialog Group Berhad's debt of just 0.054 times EBITDA is really very modest. And this impression is enhanced by its strong EBIT which covers interest costs 7.1 times. In addition to that, we're happy to report that Dialog Group Berhad has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dialog Group Berhad 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Dialog Group Berhad actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, Dialog Group Berhad's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. It looks Dialog Group Berhad has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Dialog Group Berhad that you should be aware of.

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.