Rock star Growth Puts DutaLand Berhad (KLSE:DUTALND) In A Position To Use Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies DutaLand Berhad (KLSE:DUTALND) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for DutaLand Berhad

How Much Debt Does DutaLand Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 DutaLand Berhad had RM21.9m of debt, an increase on none, over one year. But on the other hand it also has RM546.8m in cash, leading to a RM524.9m net cash position.

How Strong Is DutaLand Berhad's Balance Sheet?

The latest balance sheet data shows that DutaLand Berhad had liabilities of RM65.1m due within a year, and liabilities of RM5.29m falling due after that. Offsetting this, it had RM546.8m in cash and RM32.4m in receivables that were due within 12 months. So it actually has RM508.8m more liquid assets than total liabilities.

This surplus strongly suggests that DutaLand Berhad 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. Simply put, the fact that DutaLand Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DutaLand 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 DutaLand Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 181%, to RM95m. So there's no doubt that shareholders are cheering for growth

So How Risky Is DutaLand Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months DutaLand Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM23m and booked a RM28m accounting loss. Given it only has net cash of RM524.9m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, DutaLand Berhad's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with DutaLand Berhad (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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