We Think D'nonce Technology Bhd (KLSE:DNONCE) Is Taking Some Risk With Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that D'nonce Technology Bhd. (KLSE:DNONCE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for D'nonce Technology Bhd

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

The image below, which you can click on for greater detail, shows that at March 2023 D'nonce Technology Bhd had debt of RM39.4m, up from RM20.9m in one year. But it also has RM49.9m in cash to offset that, meaning it has RM10.5m net cash.

A Look At D'nonce Technology Bhd's Liabilities

According to the last reported balance sheet, D'nonce Technology Bhd had liabilities of RM47.0m due within 12 months, and liabilities of RM34.3m due beyond 12 months. On the other hand, it had cash of RM49.9m and RM50.3m worth of receivables due within a year. So it actually has RM18.8m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, D'nonce Technology Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that D'nonce Technology Bhd's EBIT was down 89% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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 reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case D'nonce Technology Bhd has RM10.5m in net cash and a decent-looking balance sheet. So while D'nonce Technology Bhd does not have a great balance sheet, it's certainly not too bad. 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. Be aware that D'nonce Technology Bhd is showing 3 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.