Dutch Lady Milk Industries Berhad (KLSE:DLADY) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Dutch Lady Milk Industries Berhad (KLSE:DLADY) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dutch Lady Milk Industries Berhad

What Is Dutch Lady Milk Industries Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Dutch Lady Milk Industries Berhad had debt of RM17.1m, up from RM15.1m in one year. But it also has RM54.4m in cash to offset that, meaning it has RM37.3m net cash.

How Healthy Is Dutch Lady Milk Industries Berhad's Balance Sheet?

We can see from the most recent balance sheet that Dutch Lady Milk Industries Berhad had liabilities of RM300.3m falling due within a year, and liabilities of RM6.42m due beyond that. Offsetting these obligations, it had cash of RM54.4m as well as receivables valued at RM100.0m due within 12 months. So its liabilities total RM152.4m more than the combination of its cash and short-term receivables.

Since publicly traded Dutch Lady Milk Industries Berhad shares are worth a total of RM2.19b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dutch Lady Milk Industries Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Dutch Lady Milk Industries Berhad's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dutch Lady Milk Industries 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dutch Lady Milk Industries Berhad 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, Dutch Lady Milk Industries Berhad produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Dutch Lady Milk Industries Berhad has RM37.3m in net cash. So we are not troubled with Dutch Lady Milk Industries Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Dutch Lady Milk Industries Berhad .

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. 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.
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