D'nonce Technology Bhd (KLSE:DNONCE) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, D'nonce Technology Bhd. (KLSE:DNONCE) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for D'nonce Technology Bhd

What Is D'nonce Technology Bhd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that D'nonce Technology Bhd had RM20.9m of debt in March 2022, down from RM25.4m, one year before. However, its balance sheet shows it holds RM54.4m in cash, so it actually has RM33.5m net cash.

How Strong Is D'nonce Technology Bhd's Balance Sheet?

The latest balance sheet data shows that D'nonce Technology Bhd had liabilities of RM35.9m due within a year, and liabilities of RM25.2m falling due after that. Offsetting this, it had RM54.4m in cash and RM53.5m in receivables that were due within 12 months. So it actually has RM46.7m more liquid assets than total liabilities.

This surplus strongly suggests that D'nonce Technology Bhd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, D'nonce Technology Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that D'nonce Technology Bhd's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is D'nonce Technology Bhd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. D'nonce Technology 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, D'nonce Technology 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 D'nonce Technology Bhd has net cash of RM33.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in RM5.6m. So we don't think D'nonce Technology Bhd's use of debt is risky. 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. We've identified 3 warning signs with D'nonce Technology Bhd , and understanding them should be part of your investment process.

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.