Stock Analysis

We Think D'nonce Technology Bhd (KLSE:DNONCE) Can Manage Its Debt With Ease

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies D'nonce Technology Bhd. (KLSE:DNONCE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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

How Much Debt Does D'nonce Technology Bhd Carry?

As you can see below, D'nonce Technology Bhd had RM20.9m of debt at March 2022, down from RM25.4m a year prior. But it also has RM68.2m in cash to offset that, meaning it has RM47.3m net cash.

KLSE:DNONCE Debt to Equity History September 29th 2022

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

According to the last reported balance sheet, D'nonce Technology Bhd had liabilities of RM35.8m due within 12 months, and liabilities of RM25.0m due beyond 12 months. Offsetting this, it had RM68.2m in cash and RM32.7m in receivables that were due within 12 months. So it actually has RM40.1m more liquid assets than total liabilities.

This luscious liquidity implies that D'nonce Technology Bhd's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

In fact D'nonce Technology Bhd's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since D'nonce Technology Bhd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, D'nonce Technology Bhd recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that D'nonce Technology Bhd has net cash of RM47.3m and plenty of liquid assets. And it impressed us with free cash flow of RM5.0m, being 82% of its EBIT. So we don't think D'nonce Technology Bhd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with D'nonce Technology Bhd (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Valuation is complex, but we're helping make it simple.

Find out whether D'nonce Technology Bhd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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D'nonce Technology Bhd

D'nonce Technology Bhd., an investment holding company, engages in the manufacture, sale, and distribution of advanced packaging materials, electronics products, and consumables in Malaysia and Thailand.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth0
Past Performance2
Financial Health6

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet and good value.