Does DFCITY Group Berhad (KLSE:DFCITY) Have A 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that DFCITY Group Berhad (KLSE:DFCITY) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DFCITY Group Berhad

What Is DFCITY Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that DFCITY Group Berhad had debt of RM21.6m at the end of June 2023, a reduction from RM27.7m over a year. However, it also had RM5.50m in cash, and so its net debt is RM16.1m.

How Healthy Is DFCITY Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that DFCITY Group Berhad had liabilities of RM20.8m falling due within a year, and liabilities of RM11.2m due beyond that. Offsetting this, it had RM5.50m in cash and RM5.37m in receivables that were due within 12 months. So it has liabilities totalling RM21.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of RM34.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DFCITY Group Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year DFCITY Group Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to RM18m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, DFCITY Group Berhad had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RM509k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM1.6m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example DFCITY Group Berhad has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.