Is D & O Green Technologies Berhad (KLSE:D&O) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that D & O Green Technologies Berhad (KLSE:D&O) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for D & O Green Technologies Berhad

What Is D & O Green Technologies Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 D & O Green Technologies Berhad had RM179.0m of debt, an increase on RM109.6m, over one year. However, it does have RM284.8m in cash offsetting this, leading to net cash of RM105.8m.

How Healthy Is D & O Green Technologies Berhad's Balance Sheet?

We can see from the most recent balance sheet that D & O Green Technologies Berhad had liabilities of RM390.2m falling due within a year, and liabilities of RM86.2m due beyond that. On the other hand, it had cash of RM284.8m and RM243.0m worth of receivables due within a year. So it can boast RM51.3m more liquid assets than total liabilities.

This state of affairs indicates that D & O Green Technologies Berhad's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the RM6.18b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, D & O Green Technologies Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that D & O Green Technologies Berhad has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if D & O Green Technologies Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. D & O Green Technologies Berhad 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 & O Green Technologies Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that D & O Green Technologies Berhad has net cash of RM105.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So we are not troubled with D & O Green Technologies Berhad's debt use. 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. For instance, we've identified 3 warning signs for D & O Green Technologies Berhad (1 is potentially serious) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.