Is D'nonce Technology Bhd (KLSE:DNONCE) A Risky Investment?

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. As with many other companies D'nonce Technology Bhd. (KLSE:DNONCE) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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 D'nonce Technology Bhd

What Is D'nonce Technology Bhd's Debt?

The image below, which you can click on for greater detail, shows that D'nonce Technology Bhd had debt of RM30.8m at the end of April 2021, a reduction from RM42.1m over a year. However, its balance sheet shows it holds RM40.8m in cash, so it actually has RM9.98m net cash.

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

Zooming in on the latest balance sheet data, we can see that D'nonce Technology Bhd had liabilities of RM41.3m due within 12 months and liabilities of RM25.9m due beyond that. Offsetting this, it had RM40.8m in cash and RM66.3m in receivables that were due within 12 months. So it can boast RM39.9m more liquid assets than total liabilities.

This surplus suggests that D'nonce Technology Bhd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that D'nonce Technology Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, D'nonce Technology Bhd grew its EBIT by 295% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 84% 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 RM9.98m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM9.6m, being 84% of its EBIT. So is D'nonce Technology Bhd's debt a risk? It doesn't seem so to us. 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 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.
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